So says Standard Chartered bank in their latest Metals Weekly research.
The bank was among the first to bring attention to the fad of commodity-backed financing in China, and now has this update:
Three weeks ago in our report ‘Copper – A reality check from China’ (7 March 2011), we noted that finance deals were proving to be attractive to trading firms by freeing up cash amid tight monetary conditions. Borrowing copper and converting it to cash via banks is proving to be easier and cheaper than conventional borrowing. Discussions with importers this week suggest that this kind of finance has become even more popular since then.
They add — worryingly — that the financing scheme has got so popular that it’s actually best to stop describing copper as a commodity in China completely. It’s now seen just an ‘excellent’ form of collateral.
Here’s some more from their note (our emphasis):
Various sources tell us that in the latest example of this, companies that previously had no experience in metals trading have stepped up copper-buying in order to secure loans from banks. Domestic property developers are one example, given the difficulties of getting loans for project development.
The cost of funding based on these deals is low, compared with the yield generated by property sales. It seems more (rather than less) companies are likely to start using copper as collateral in the weeks ahead. Therefore, we would not be surprised to see high copper imports reported for March (when the data comes out in early April), despite very high import prices.
However, it is important to note that these imports are being stockpiled rather than consumed. Copper inventories in China (both on-warrant and off-warrant) have reached very high levels. We estimate that copper inventory in three major bonded warehouses in Shanghai has hit 700,000 tonnes (t) this week, up 28% from 550,000t in early March.
Official data from the Shanghai Futures Exchange indicated that copper inventories at its warehouses were at 172,000t as of last week, the highest level since May 2010. This is 30% higher than at the start of the year, showing a near-term oversupply of the metal. In contrast to strong buying interest for financing purposes, China’s copper imports based on real demand remain extremely soft.
But this, in our opinion, is the clincher (!):
According to traders, there were almost no imports of copper on a cash basis for March. By contrast, we estimate that an average of around 100,000t/month of refined copper was imported on a cash basis last year. We previously expected March’s refined copper imports to stage a moderate rebound from February’s 158,185t, but recent field trips suggest that the best outcome would probably be little change due to the absence of spot buying interest.
In case you missed it, that’s: NO IMPORTS OF COPPER TO CHINA ON A CASH BASIS FOR MARCH.
Which begs the obvious question: do exporters realise exactly what they’re funding? Furthermore, does the People’s Bank of China know how its tightening measures are spilling over into elaborate new financing mechanisms — and to what degree they’re now skewing the market’s understanding of world trade fundamentals via distorted real commodity supply and demand signals.
The ultimate dangers, of course, are obvious.
Exactly what happens when all that copper is finally and permanently released from inventory?
Standard Chartered, for one, sees it like this:
That said, we understand that potential buyers still regard a 10% drop in prices as potentially very attractive, so Chinese-based investors maintain their ‘buy-the-dips’ mentality for now. Despite this, evidence of stockpiling in China for finance purposes is ultimately bearish for the market – once this stock is released, prices will fall. For now LME prices may be pushed higher by continued strength in Chinese imports. This dynamic should be monitored closely, as the release of excess inventory to the wider market represents a potential downside threat to copper prices over the medium term.
Standard Bank says Chinese copper market cause for concern – FT Alphaville
China’s bonded-warehouse copper mystery – FT Alphaville
China’s copper as collateral addiction – FT Alphaville
Copper’s rise slowed by Chinese oversupply – FT
Simply amazing commodity collateral shenanigans in China – FT Alphaville