Once again China has emerged as a pivotal mover in the commodity markets. As copper prices soared to all-time highs last week of $4,243 per metric ton, all eyes were on China. However, it’s not because demand from that country has topped expectations. Rather, it was because a government employee is rumored to have engaged in what only can be described as a huge and reckless trade. And the government has responded in true Chinese fashion.

Friday’s Financial Times carried this amusing headline: “China Predicts Copper Price Fall.” The story quoted China’s National Development and Reform Commission in predicting that the country’s need for imported copper would drop slightly next year, causing the price to slide to $3,500 a metric ton from current record levels of roughly $4,150.

The statement from the NDRC should have added: “from our lips to God’s ears.”

China is doing everything in its power to drive down copper prices, because the country may have to make good on an enormous short sale allegedly made last spring. The trade was reportedly made on the London Metals Exchange. An LME spokesman said they do not comment on rumor and speculation.

The story that has roiled copper markets in recent sessions and sent prices to unprecedented levels (gaining 3% last week alone) concerns a missing trader named Liu Qibing.

Mr. Liu has been incommunicado for weeks, but is said to have disappeared after having sold short some 100,000 to 200,000 metric tons of copper on the London Metals Exchange, beginning last spring. Rumor has it the Chinese may not be able to deliver the contracted amount, which is due in mid-December.

The situation, according to Ed Meir who produces the Daily Metal Report for the Man Group in Britain, “has been mishandled by the Chinese. At first, they denied any losses, or that they knew Mr. Liu,” which of course only fueled speculation.

China Daily, which normally carries the burden of communicating with the West, has quoted various Chinese officials as claiming that Mr. Liu acted on his own, and “alone should be blamed for the loss.” Mr. Liu is described in the paper as “the former import division chief of the National Control Center for the Reserve Bureau,” a unit of the NDRC. The job of the Reserve Bureau is to oversee China’s commodity reserves.

China sold copper into the market last week to suppress the price spike caused by the alleged short position. Further short-term pressure on the price resulted from the Chinese government’s apparent preparations to export 30,000 metric tons of the metal before the end of November. The government has claimed that it holds copper inventories amounting to 1.3 million metric tons, but market watchers say the actual number is closer to 200,000.

Though the Chinese government has hinted they might walk away from the mess, most analysts presume they will have to settle the contracts. They might cover the short positions by delivering the metal to the London Metal Exchange’s Asian warehouses (which appears difficult given the amount and the short time frame), or roll the positions forward, or buy them back. Mr. Meir believes that a combination of these approaches may ensue. Settlement, given that the spot market for copper has been priced about $200 a metric ton above the forward market for months, will be costly.

The markets are concerned not only about China’s ability to deliver the metal, but also about the brokers that hold the contracts. Sempra, an energy company in San Diego, is one firm thought to be involved; the others are not known. A Sempra spokeswoman said that as a policy they do not comment on trading positions.

This melodrama has been played out against a background of already tight copper markets. Prices are up more than 30% from the end of last year.

China is one of the major incremental consumers of copper, with demand up an estimated 6.1% this year according to the NDRC. It is projected that consumption will increase another 8.5% next year.

A report just published by the International Copper Study Group on the occasion of its annual meeting on November 15 showed world mine production likely to rise 3.1% this year and an additional 5.1% next year. This year’s output was hampered by disruptions in Chile and America.

Though demand is calculated to be off slightly this year due to a drop in America and Europe, production will not equal the need for the metal, meaning that worldwide inventories will shrink again this year. It is estimated that copper inventories, following three years of production deficits, “are at their lowest levels in more than 30 years.”

The report predicts the supply/demand balance will improve next year as production increases. On the other hand, worldwide consumption is set to increase 5.5%. As Mr. Meir says, “Copper looks pretty solid from here.”

In his view, the market will see another sharp spike up when the Chinese actually step in to cover their positions, and may then experience a correction of as much as 5% to 8%, as things revert to normal.

In any case, it was a pretty strange commodity to sell short. Meanwhile, the market’s volatility has no doubt been exaggerated by hedge funds. These traders have been unwinding their energy positions as oil prices have dropped, and they have charged into copper and gold, which is also recording solid price gains.

Meanwhile, there are lessons to be learned. Mainly, the Chinese have a long way to go before they can be judged fully compliant with the transparency and reporting requirements of global trade. Much as the country is a delectable growing consumer market, suppliers should beware. More than one bruised neophyte has emerged from a scuffle with his Chinese counterparts having to remind himself that “we’re not in Kansas anymore.”