August 15, 2000

Commodities

Palladium Futures Plunge,
As Profit-Taking Sets In

By DAVID BOGOSLAW
Dow Jones Newswires

NEW YORK -- Substantially higher margins on palladium futures imposed over the last week by the New York Mercantile Exchange took their toll as futures plunged on profit-taking by local floor brokers and speculators, traders said.

Nymex's September palladium contract was down as much as $60 before ending with a loss of $41.05 at $744.45 a troy ounce Monday.

All exchanges require traders to deposit margin, or money to cover the risk of losses, but a marked rise in palladium prices has prompted rapid margin increases by Nymex.

After raising margins on August and September futures three times last week, Nymex announced Friday three additional increases due to take effect at the close of business Monday, Wednesday and Friday this week.

"The margin is $60,000 per contract. It'll be $80,000 on Wednesday and $100,000 Friday. Mind you, the contract is only worth $74,000 at the close today," said one New York-based trader.

Nymex first announced it would raise margins Aug. 4, during a week that saw palladium prices surge to an all-time high of $855 an ounce. Erratic shipments from Russia, the world's largest producer, and concerns that negotiations between Russian export agency Almazjuvelirexport and Japanese trade houses will be dragged out have created a recipe for price volatility.

By the close of business Aug. 18, the margin on a contract will have risen over the last 10 days to $100,000 from $5,000 for clearing members, to $110,000 from $5,500 for members, and to $135,000 from $6,750 for customers.

"The industry is surprised at the extent of the new margin requirements," said Chicago-based Leonard Kaplan, president of Prospector Asset Management. "All the industry is talking about is how can you charge 150% of contract. In this case, we're not close to the delivery month yet."

By the end of the day, open interest -- the number of outstanding contracts -- in September had fallen to 783 from 852 contracts when the market opened.

Open interest in December futures has increased to 1,234 contracts from 900 contracts 10 days ago, indicating that 300 rollovers from September have taken place.

Forcing rollovers was the exchange's intention in raising margins, many bitter participants contend. Worried about a possible squeeze taking place at the time of delivery, the exchange is trying to force undercapitalized players out of the market before that can happen, they said.

A squeeze occurs when a shortage of supply forces players who have sold short, or bet on lower prices, to pay whatever holders ask in order to secure physical metal for delivery.

"The entire warehouse stocks are only 150 contracts," said Prospector's Mr. Kaplan, "and that's the reason Nymex took this significant action." Nymex-approved warehouses are located in New York and Wilmington, Del.

The second trader called it "the death knell of this contract," as the purging of floor brokers and speculators further eroded an already thinly traded and illiquid market.

"If they relax margins once again, I think you'll see volume come back. I don't think this is a contract-killing situation," said Dave Meger, senior metals analyst at Alaron Trading in Chicago.

In other commodity markets Monday:

CRUDE OIL: Futures rose at the Nymex on concerns about record-low stockpiles ahead of inventory data due for release after the session. The September contract added 92 cents to $31.94 a barrel. "There must be addition to stocks or prices will climb out of control," said John Kilduff, senior vice president at Fimat, U.S.A., in a report Monday.

PORK BELLIES: Futures fell by their limit at the Chicago Mercantile Exchange, and to the lowest level since last November, on selling ahead of the Aug. 28 expiration of the August contract. That contract was down three cents to 74.17 cents a pound. Traders in the belly pit are nervous about the delivery situation, fearing that "low quality" product from the East Coast might get delivered against the August contract, said Bill Cipolla, a belly trader with Iowa Grain.

--Daniel Rosenberg and Marie Sanchez contributed to this article.

Write to David Bogoslaw at david.bogoslaw@dowjones.com¹

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