TAKEDOWN - Chapter I

As LME Week gets under way, Metal Bulletin presents a fictional tale set in the metals trading industry by Geoffrey Sambrook. Chapters II-VII will be published this week.

I

Jason Serck was a powerful man in the resource industry. His fund, Leopard-Star Associates, was one of the biggest in the sector and since the autumn of 2015, when through his sharp trading he had also secured the ownership of Metal-Exx, the biggest player in the physical metal trading business. Through the good offices of his wife, he was also a mainstay of the Manhattan charity ball circuit; that evening, he had paid $25,000 a head for a table at an event held at a chic club overlooking the East River to raise money for research into a cure for the zika virus, fear of which had hovered over the Olympics in Rio a few months earlier. It was a mid-ranking event, overall, but lent an patina of greater exclusivity by two of the other guests, an A-list movie star, in town mainly to harangue the UN about some pet cause or other but also taking the podium at the zika dinner to burnish his philanthropic credentials with a speech written for him by the organising committee (but, to be fair, he did waive a large part of his fee), and California’s own South African electric vehicle titan, Elon Musk of Tesla Motors.

As the guests mixed after the formal dinner was over, Serck found himself standing alongside Musk, who had been seated at a neighbouring table, next to the formidable organiser, a lady of impeccable WASP credentials, rarely seen anywhere but the Upper East Side of Manhattan or the Hamptons. The two men exchanged introductions and then strolled together outside onto the balcony of the Club, overlooking the East River. There is no record of what they discussed, but they spent a good hour in animated conversation before Serck’s wife tracked him down to take back to their own guests. Serck was one of the world’s most successful investors and speculators, but he never crossed his wife. Musk stayed out on the balcony a little longer, seemingly deep in thought.

Serck was quiet and thoughtful, as well, as the car took them back uptown to their Park Avenue condo. His answers to his wife as she ran through the ups, downs and sideways of the evening were on auto pilot.

The next morning, under a clear pre-dawn sky with no wind and an unseasonable warmth, he sent the chauffeur on ahead to the office with his papers and strolled the short distance down to Leopard-Star’s office on Fifth Avenue. The phone in his pocket stayed resolutely silent all the way, a sign of an unwelcome truth to a man whose business depended on markets moving. The last year had been tough; not because Serck had made the wrong market calls – he could handle that. Being wrong from time to time was part of the game; as long as it was outweighed by the number of times he was right, everything was fine. No, the problem he was facing was markets resolutely refusing to show any direction at all. Oil was drifting away again, after a false hope rally back to around $50, and looked like heading yet lower, with traders talking confidently of the glut continuing at least through the next year. Industrial metals seemed unable to rally significantly, yet had dropped so far as to make further falls unlikely. True, there had been some violent action back in June in the wake of the UK’s Brexit decision which had created some short-term opportunities but that was about all. Precious metals and currencies had ranged around, but Serck preferred to stick to the industrial commodities he knew. The bad spell of the last few years was continuing for Leopard-Star, and that silent phone was an indicator of how quiet it was.

The frustration for Serck was that the deal that he had expected to provide a counter-balance to his otherwise exclusively financial market dominated investments hadn’t really done the job. In the autumn of 2015, he had engineered a situation which had enabled him to take ownership of Metal-Exx, the world’s foremost trader of industrial metals. He had anticipated that that company’s physical trading books – above all their premier position in copper and aluminium trading – would have powered on, producing healthy profits. Well, the books were certainly active, but flat markets were flat markets, and profits difficult to make. Aluminium remained driven by the warehouse storage trade; sure, Metal-Exx were big players there, but the business swallowed capital and produced a small return. True, it was close to risk-free, but investors in Serck’s fund wanted growth, not low risk. The copper concentrate business, with its peculiarities of pricing methods, was great for smart traders in moving markets, but, again, the lack of price movement was a problem, rendering almost worthless the variety of options the Metal-Exx traders had carefully built into their contracts. No, the truth was that Leopard-Star urgently needed something to boost returns before too many investors started thinking about withdrawing their money. In his more gloomy moments, Serck sometimes wondered if the model was played out. In the world of low interest rates and low economic growth, the traditional hedge fund 2% management fee and 20% performance share looked increasingly anachronistic. How much longer would investors keep paying those levels when the performance could hardly be said to justify them?

But Serck was essentially not a pessimist and he knew one big trade could turn things around and bring back the glory days. And the conversation he had had the previous evening, together with a brief bank analyst report he’d read a couple of weeks earlier, had set the cogs of his mind turning.

The sun was just appearing over the horizon as he reached the office. Settling in front of the bank of screens on his desk, he picked up the phone and hit a speed-dial number.

“Eisenstadt,” came the voice at the other end.

“Max, good morning, it’s Jason.”

“Jason, hi, how’re you this morning?”

“Yeah, I’m good, Max. I just had a question for you.”

Max Eisenstadt was the veteran trader who ran the Metal-Exx aluminium business. He was also the man in Geneva in whom Serck had the greatest trust. A Metal-Exx board member, he was also de facto the head trader, keeping an eye on the company’s overall position as well as trading his own book. By now he was well past normal retirement age, but the pull of the aluminium market he had known for decades was strong enough to keep him at his desk, even though he knew he could never spend the money he’d already made. Serck relied heavily on his knowledge of the Metal-Exx business.

“Sure, Jason, what do you want to know?”

“How involved are we with Congo Copper these days? Are we still their main offtaker?”

‘Yeah, pretty much, I guess. We had a bit of a contretemps with them a year ago, when you bought the company, in fact, so I guess you know about that? But we’ve got a lot of long-term contracts with them, and we booked a fair bit of new business at the end of the year, even though the relationship was a bit frosty. Realistically, we’re the best partner for them, and they know it. DeWet Steyn may be a pain a lot of the time, but he knows where his bread’s buttered. And their production fits into our China delivery schedules nicely. So we keep on working together.”

“No problems from when I told you to cut back the pre-payments we make?”

“Well, they moaned and groaned, but, you know, we still show them better terms than Glencore or Trafigura or any of the others, so the business goes on. It’s good for us, in the normal run of things; obviously, with this flat market most of the optionality in the pricing – where we make our money – is of limited value. But it will come back. Anyway, Leopard-Star is still a substantial shareholder, aren’t you?”

“Yeah, not as big as we were, though. We chopped some out at the beginning of the year; we were a bit concerned about metals, with the China slowdown, so we concentrated our holdings on the majors – Rio, BHP.” He gave a humourless laugh, and continued, “Probably the right thing to do at the time, but it’s been pretty flat since.”

“Well, that’s not my area. You know my view – you get more bang for your buck from direct investment in the metals than you do from the equities. But it’s all been pretty lousy this year.”

“Mmm. I think it may be time for me to have a meeting with Steyn. I haven’t seen him for a while – not really since the take-over, when he behaved a bit stupidly.”

Eisenstadt was too canny to ask how Steyn’s behaviour had displeased Serck; one of the reasons behind his success was that he knew when not to open his mouth.

“I thought I would fly into London on my way to our next Geneva board meeting, the week after next. Can you just get over to me the broad details of what we’re doing with them – just rough tonnages and how far forward they go?”

“Sure. You’ll have it today. Do you need anybody from here with you?”

“No. My main purpose is to talk to him as a shareholder – I just need to be aware of what actual deals we have with them as well, that’s all.” Serck hung up.

He called to an aide to bring him the bank report he had remembered earlier, and moved to sit in a black leather chair in front of a coffee table by the corner window, looking south down Fifth Avenue. A coffee in front of him, he read through the document, making a series of notes on a pad. Mostly, the news was not good for Congo Copper. They had a fundamental problem in the current market: they were at the wrong point on the cost curve and would continue to find life difficult until prices recovered. As a long-time shareholder, Serck knew that. What interested him was contained in an appendix. After reading that through two or three times, he sat, staring through the window at the street below, bustling now in the unseasonal sunshine. The seed that had been planted in his mind the evening before, talking to Elon Musk, was beginning to germinate. He spent half an hour composing a detailed email to a mining surveyor, with some very specific questions.

Chapters II-VII will follow daily

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