Analysts are confused. Be it the New York copper futures, Singapore mercantile exchange, or Tokyo's massive copper market, the situation is pretty glum. "Metals are defying market logic, and prices are crashing despite reasonable demand-supply positions,'' Bombay Metal Exchange president Sharad Parikh said.

So, what went wrong? Metal markets, once a haven to which investors occasionally diverted funds from crashing stock and currency markets, are no longer so. Most metals are at their historic lows after touching record highs only last year. Moreimportantly, producers are selling at wafer-thin margins, leaving little for traders.

Let's have a look at the LME. Copper, for example, was seen at $2,222 per tonne in 1997 when the Sumitomo trader Hamanaka was taking his positions. The metal now rules at around $1,455. Zinc is in surplus after being in deficit for the last two years, while lead has lost more than $100 per tonne over the last nine months. Nickel's course is even more alarming, as it rules around $4,100 per tonne, against $4,935 in 1997.

``Crisis in the Asian region, triggered by the devaluation of the Thai baht, quickly spread, and mostly affected manufacturing activities,'' Parikh says. A protracted bear market, the result of aslump in Far-Eastern demand, has repelled speculative money. While producers were reluctant to sell, consumers waited for their turn. Traders are the worst hit. Turnover has dropped, trade has all but evaporated.

Short carries, on which little commission was made, artificially inflated turnover. As a result,broking profits have flopped. The result--most members are suffering huge losses. Most big companies are known to have recorded a drop in contributions from foreign exchange and commodities by 30-40 per cent.

It's time to do or die for LME traders. The recession will ignite a wave of consolidation among traders. The first casualty was Billiton Metals, which bowed out, and sold its ring subsidiary to Germany's Metallgessellschaft AG. No wonder, the hunt will now be on for compensatory business elsewhere in metals, including physical trade and project finance.

The trigger: The devaluation of the Thai baht is still fresh in the memory of many. A minor correction in the currency exploded to assume gigantic proportions, swallowing a continent which had embarked upon explosive growth. Metal being related to infrastructure, heavy-investment sectors took painful bodyblows, consumption dropped as automobile companies in Korea, Japan and other Asian countries delayed purchases, which were never made even later.Stainless-steel producers also cut demand. China, the major player in all seasons, vanished, while Japanese traders, always cautious to book their requirements well in advance, started selling their stocks.

What next?:

"Only a recovery by the world economies, especially those in the south-east Asian region, will help the metals," say analysts. But others believe that everyone related to the industry have to play a role. Metal producers, for instance, will have to come together, sit around the table, and take tough and painful decisions regarding output cuts. Surprisingly, there has not been any concerted effort to cut output, while all have shown interest to stockpile LME warehouses with tonnes of metals everyday. "Having made huge investments in mining, smeltering and refining projects, nobody would like to stop production for even a single day,'' an analyst said. True, but where are the buyers? The LME is estimated to have a stock of 5,26,275 tonnes, and daily, more than 2,000 tonnes of variousmetals are shipped in.

What can the markets do?:

Sumitomo Corporation and its rogue trader, Ysuo Hamanaka, are still fresh in the memory of traders. In fact, the LME learned a lesson from that experience, and is busy finishing implementation of a draft of new rules recommended by regulators after Hamanaka lost some $2.6 billion from unauthorised copper trading, which rolled the metals markets in 1996.

The LME plans to provide more transparency to trading practices. The exchange is well aware of the situation, and has admitted the likelihood of a substantial 2O per cent decline in turnover in 1998, against a 20 per cent jump in turnover last year. The LME will widen its horizons through the silver contract, as it will put the exchange in direct competition with the London inter-bank market and the New York Mercantile Exchange. Introduction of the last LME contract was in 1992, when it started trading in aluminium alloy. LME chairman Lord Bagri said that an index contract could channel the interestof financial players away from one or two widely traded metals, thereby reducing possible distortions in the underlying individual metals contacts to the benefit of the market's industrial users. The involvement of large investors, including hedge funds, in LME trading in recent years did change the nature of metals trading, says an analyst. He said that they recklessly liquidated their short positions, leading to a decline in copper prices. Lord Bagri also agreed when he told Reuters newswire that the exchange will set limits on "abusive short positions" in the metals markets, partly to ease concern about the impact of funds on metals prices. Investors generally take a short position when they take on commitments to sell more than they own in the exception that prices will fall.

But is this all enough?: ``Any turnaround will depend on a recovery by the world economies, and a shortage of metals. Both these cases are quite unpredictable for the moment,'' Parikh says. Hedge funds can be crucial players in anyreceive, many believe. This thinking is based on the fact that most of them have lost money in other markets, and may be forced to take profits from large short positions, fuelling a sharp rise in markets. But traders feel that only the return of large speculators can accelerate turnover and enhance liquidity.