London Metal Exchange copper prices fell close to their lowest levels in three years on Monday, while Shanghai copper prices fell to their lowest since September 2009.
AFP/Sydney
China’s first domestic bond default has brought to the fore investors’ fears that financing deals that have locked up vast quantities of copper could unravel and erode one of the market’s main underpinnings.
China is the world’s top user of copper, accounting for more than 40% of global consumption. But much of its imports are used as collateral to raise funds, which are then loaned out into China’s shadow banking sector to earn higher yields. A lot of that money has been used to invest in real estate.
The bond default by loss-making Shanghai Chaori Solar Energy Science and Technology Co Ltd late last week, however, signalled a reassessment of credit risk in a market that long assumed even high-yielding debt carried an implicit state guarantee.
That is seen leading to tighter credit for both actual users of metals and financiers, with a possibility that some of the metal held as collateral may be dumped onto the market as loans are paid back. A crackdown on shadow-banking credit, which would strike at the heart of the copper financing deals, has already begun to erode appetite for metal, some industry sources say.
London Metal Exchange (LME) copper prices fell close to their lowest levels in three years on Monday, while Shanghai copper prices fell to their lowest since Sept 2009.
“People appear to be worried that China is ‘getting real’ about credit, and that in such an environment, industrial demand growth for copper will be less,” said an analyst at a global commodity trading house who declined to be named because he is not authorised to speak to the media. “With slower demand growth and possible liquidation of surplus metal units from financial arrangements, people are worried about the short term demand outlook for copper.”
While no analyst or trader Reuters spoke to could give a definitive figure for how much copper is tied up in financing deals due to the opaque nature of the market, they estimated 60-80% of imports could be due to financing demand. On the ground, traders are finding it tough to get credit in a market where prices are falling.
“Right now it is very difficult for clients to issue an LC (letter of credit) to import copper because the bank loan is very tight. Also if you import the copper in China you will lose a lot of money,” said one trader in Singapore.
Arrivals of unwrought copper in China fell in February from record levels struck the month before in a sign financing demand for copper has already begun to ebb. The falling yuan and China’s cooling property prices had eroded profits for some financing deals, analysts said. The yuan fell by 1.42% from mid-February to March 5 when it hit its lowest in more than six months, although it has since pared some of the losses.
Some economists believe that by letting interest rates fall and simultaneously forcing the yuan down, Beijing is conducting a short-term attack on speculators, who have been pouring money into China to cash in on a rising yuan and high yields on debt. Some have faked trade deals to sneak money into China past strict capital controls. Those and other measures to cool China’s searing housing sector have had some effect, with official figures in January showing that home price growth eased for the first time in 14 months.
“Widening import losses since December 2013, combined with a sudden bout of CNY depreciation, have quickly dampened the appetite for financing,” said Barclays in a note.
“While we do not consider it likely that deals will be unwound due to the currency move, it is likely to reduce financing flow going forward.”
Shanghai copper prices, which are usually higher than global prices because of a tax on imports, had fallen closer to global prices, suggesting traders may soon consider exporting to global markets instead, putting more pressure on global prices.
