On Wednesday, we drew attention to a Standard Chartered report which claimed that as much as 550kt of copper was stockpiled in bonded warehouses in Shanghai by late February — the majority of it being used as collateral for securing financing deals.
A clever inflation hedge, if you will.
The implications of such practices, however, are potentially huge for the global economy. Analysts, after all, keenly watch Chinese copper imports to determine the state of the global economy — specifically how global demand is faring.
Now, if Chinese copper imports are more about inflation hedging and financing deals than production demand, that dramatically changes the function of the data in ascertaining the health of the global economy.
While the whole copper as collateral story is not new, it still hasn’t penetrated market concsiousness deeply enough to change attitudes. It’s also still a story that relies on anecdotal evidence rather than cold hard facts, and consequently deserves a lot more investigation.
That said, among the anecdotal evidence that does exist is this rather illuminating Bloomberg story from February 23 — which seems to have slipped to the wayside. It echoes exactly the Standard Chartered view, while adding some important additional details.
Please note the emphasis:
Feb. 23 (Bloomberg) — Copper held in bonded warehouses in Shanghai has jumped as more traders import the metal to use as collateral to obtain funds, either for re-lending or to finance corporate development, according to analysts and traders.
Inventories have climbed to about 600,000 metric tons, said Zhao Kai, an analyst at the futures unit of Jiangxi Copper Co., China’s largest producer. Bonded warehouses are used to store shipments before duties are paid and official data on levels of holdings aren’t issued.
Last November, the total was 300,000 tons, according to a Scotia Capital estimate at the time. China has stepped up tightening measures as policy makers seek to avert overheating.
Traders in China can still use copper as collateral to obtain money from banks, which can then be re- lent to third parties, said Jia Zheng, a trader at Shanghai East Asia Futures Co.
“It appears that the practice of using copper to obtain financing is increasing as companies start to feel the effects of the tightening measures,” said Liang Lijuan, an analyst at Cofco Futures Co. “Imports have been surprisingly high.”
Imports of copper and its products by the world’s largest user were 364,240 tons last month, customs data shows. That’s the highest level since September and 25 percent more than a year ago. Copper on the London Metal Exchange, which rose to a record $10,190 a ton on Feb. 15 on speculation that demand will surpass supply, was at $9,518 at 12:46 p.m. in Singapore today.
And for the real clincher, Bloomberg states the bonded-warehouse holdings may now be almost four times the amount of copper tallied by the Shanghai Futures Exchange.
They also explain to what degree this might now be distorting the real picture of demand:
Such unreported stockpiles help to distort the actual picture of demand, said Li Ye, an analyst at Minmetals Starfutures Co.
“Banks and authorities must know of this practice and yet no one has decided to take solid action yet,” said Jeremy Goldwyn, who oversees business development in Asia for Sucden Financial Ltd.
If holders of such metal were forced to repay their loans and sell the material, prices would drop, he said.
Copper “imports have been high but few people are buying, and if you look at the arbitrage it doesn’t make sense at all to import,” said Fang Junfeng, an analyst at China International Futures (Shanghai) Co. “That’s why some of the inventories not being held for financing purposes are being exported to LME warehouses, awaiting the arbitrage window to open again.”
Given the above we at FT Alphaville feel some effort should be made to determine answers to some of the following questions:
1) Exactly which banks and lenders are in the business of extending loans against copper collateral?
2) What are the terms and conditions of such deals?
3) To what degree are authorities aware of the issue?
4) How pervasive is the practice exactly?
5) Where can we find a list of Chinese bonded warehouses who may be safeguarding copper collateral in this way?
6) What sort of companies are involved?
7) What copper price level would trigger a mass “negative copper equity” sell off?
8) How much of Chinese stimulus spending went into such stockpiling?
If anyone has any answers, please do get in touch.
More proof the Chinese have been using copper as collateral – FT Alphaville
What really drove Chinese commodity imports? – FT Alphaville
China, the currency factor and copper – FT Alphaville
Is ‘cash for commodity’ the biggest trade in town? – FT Alphaville
A ‘Copper Standard’ for the world’s currency system? – The Telegraph