We’ve seen explanations of how the famous Chinese copper (and other commodity collateral) LC financing trade works in the past.
But here’s a particularly good one from Goldman Sachs’ big report on China’s credit environment, which was out last week. The diagram also explains how SAFE’s new regulations are likely to restrict the trade from now on: Read more
Kate’s post on the June China trade data mentions that commodities imports were the only bright spot (although it’s a somewhat dubious bright spot if it indicates a resurgence in investment). It turns out that copper imports were particularly strong, recording a 9.7 per cent year-on-year increase in June, a rather large change compared to a 14.6 per cent decline in May.
Goldman point us to one compelling reason why that might be the case. It’s basically another case of whack-a-mole financing in China. Hit over-invoicing over the head and up pops ‘Cash For Copper’ (CFC) financing. Read more
Now that the possibility of a sharp slowdown in Chinese growth, or even an outright contraction, is getting some serious airplay, we can expect a ramp up in forecasts about what this will mean.
Here’s one from Barclays commodities analysts, Sudakshina Unnikrishnan and Jian Chang. They note that their China economics colleagues, having gifted us with the awkward ‘Likonomics‘ neologism, are also canvassing the possibility of a big drop in the country’s GDP growth rates. Read more
What’s really responsible for higher US yields? Falling demand from domestic and western investors? Or Chinese and Japanese official flows?
Earlier in June, TIC data sent us a very important message. Abenomics was somehow prompting the repatriation and redistribution of money held in long-term USTs by Japanese investors, as this chart from Nomura shows:
This is copper’s recent performance:
The 2011 low is well within sight, and the market is likely to be headed in that direction, say BNP Paribas’ commodity research team. Read more
Implied copper volatility has risen sharply over the past month, according to Goldman Sachs:
…not that the levels are in any way unprecedented. Read more
With the S&P 500 making a fresh run higher at pixel time, it would be rude not to share the latest thoughts of Albert Edwards, Socgen’s Ice Age bear. Rather than gawping stocks, he reckons we should be mindful of the red metal…
When it comes to commodities everyone understandably likes to focus on supply and demand. However, there is another important driver for commodity prices that’s sometimes overlooked.
The real interest rate. Read more
Some deep thoughts from Goldman Sachs, by way of Jeffrey Currie and team, on the drivers of the current commodity sell-off (and no, their short gold advice from last week isn’t listed as one of them):
The sharp sell-off in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks. The decline in prices was exacerbated by the breach of key technical price support level at $1,530/toz and then at the $1,434/toz 200-week moving average, creating the largest one day decline. Spillover from gold and renewed European and EM macroeconomic concerns also created sharp sell-offs in crude oil and base metals, that were mostly front-end driven, crushing spreads (the carry), as longer-dated prices remained remarkably stable.
A small selection from our inbox the last few weeks.
First, this from Barclays on Friday, about copper: Read more
What now for Xstrata CEO Mick ‘The Miner’ Davis?
Bloomberg thinks it has the answer: Read more
A strange thing is happening in commodity markets.
As we already commented on Twitter, what the physical supply and demand situation is telling us is getting increasingly disconnected from what the forward and futures markets are saying.
The curve, in short, is feeling mispriced. Read more
China’s copper mountain continues to build. Over the past month Chinese bonded (as in copper inventories in Chinese warehouses that are yet to pay VAT) and SHFE copper inventories have risen to record high levels, according to Goldman. Anyone with new pics of the phenomenon will be rewarded with an Alphaville mug (probably).
Capital Economics ponders whether falling commodities prices will harm the emerging economies that rely most on selling them, and comes up with an answer: not much. At least, for most of them… Read more
BHP Billiton is taking a step back from its planned $20bn expansion of its Olympic Dam copper and uranium mine — as many had suspected it might.
The company wrote down $346m on its investment so far in the South Australian project. That, combined with writedowns on its North American shale gas assets, led to a 21 per cent decline in its full-year profit after tax. Read more
Remember how China was being buried alive in copper a few months ago? The stuff was piling up in carparks? Now it’s even WORSE.
Judy Zhu and Han Pin Hsi, the Standard Chartered analysts who brought us the carpark images back in April, have been on another fact-finding mission, this time beginning in Waigaoqiao where they found this: Read more
If you’ve been following the copper story, you’ll know that Chinese warehouses have over the last few years been rammed full of copper inventory which has been doubling up as collateral for financing agreements with Chinese businesses.
You also might remember this story from last month about how China was sending copper shipments to LME warehouses, where fundamentals were much tighter, despite its usual position as a copper importer. Read more
Goldman Sachs’ latest commodity note considers the influence of China’s bonded warehouses, chock-full of copper, on the underlying market for the metal.
First, they admit that the popularity of copper financing deals led to about 640-650kt of copper being stored in Chinese warehouses at its peak at the end of April. This, however, is now on the decline. Their latest assessment of the market puts Chinese bonded warehouse stocks at about 550-570kt. Read more
Here’s a bearish take on what the post-stimulus, rebalancing Chinese economy will mean for demand of steel, copper and aluminium:
Adjusting to a new paradigm: We see a no/low growth scenario off what is now a very high base level of demand as a realistic rather than a disaster scenario Read more
From oil to copper, something strange is going on with commodity inventories.
Official stocks are rising across numerous commodities, but analysts and traders swear fundamentals remain tight, while prices stay supported: Read more
According to Wikipedia, compulsive hoarding is a disorder characterized by the excessive acquisition and inability or unwillingness to discard large quantities of objects that would seemingly qualify as useless or without value.
We’d like to make the case that China is suffering from this disorder and that we’re at the stage where a psychopharmacological intervention needs to be organised by China’s friends and family. If not China’s hoarding tendencies could destroy the world as we know it. Read more
Sean Corrigan at Diapason Commodities has sent us another fascinating chart. It shows the hot money inflows into China which are unaccounted for by the sum of the trade balance, FDI, interest earned and FX revaluations.
That’s to say there’s still a large chunk of inflows left over after all of the above is considered, the volumes of which happen to correlate very nicely with changes in the combined aluminum, copper and zinc (and lead from 2011 onwards) stocks of Shanghai and the LME. Read more
It’s hard being listed, huh?
In his first television interview, Glasenberg said that Glencore took corporate responsibility seriously, saying: “We care about the environment. We care about the local communities.” Read more
A patch of global growth angst was weighing on sentiment and encouraging traders to pare positions in riskier assets after their recent good run, the FT reports. The FTSE All-World equity index, which last week hit a near seven-month high on easing eurozone debt tensions, hopes for the US economy and expectations of continued central bank largesse, was lower for the third consecutive session, down 0.8 per cent. Europe’s FTSE Eurofirst 300 started its day with a loss of 1.2 per cent, again following weakness in the Asia-Pacific region which retreated 1.1 per cent. S&P 500 futures pointed to Wall Street shedding 0.8 per cent at the opening bell. Commodities were attracting sellers on demand worries. Copper, the industrial and development bellwether, was down 1.4 per cent to $3.80 a pound. Currencies were displaying traditional responses to the downbeat tone The euro was dipping 0.4 per cent to $1.3173 and the dollar index was up 0.2 per cent. The South Korean won, usually highly vulnerable to broader market mood swings,was down 0.5 per cent versus the buck.
A relatively important development in the Chinese copper collateral scheme via the Bloomberg wire on Tuesday (H/T Sean Corrigan):
Feb. 28 (Bloomberg) — Some Chinese banks have stopped approving loans to companies using warehouse receipts of copper as a pledge, the Oriental Morning Post reported today, citing an unidentified executive at a state-owned bank. Approval will only be given to companies that have fixed buyers of downstream products, the newspaper said, citing the bank executive. The suspension came after banks found that companies used the same collateral to apply for loans from more than one bank, posing risks amid volatile metal prices, according to the report. Read more
Intervention props and promises were powering global risk assets in early European trading, the FT reports. The Nikkei 225 in Tokyo jumped 2.3 per cent as investors welcomed the Bank of Japan’s unexpected move to bolster its asset purchasing programme by another Y10tn. Financials in particular liked the idea of the central bank supporting the market. And the euro leapt in early Asian action, even after eurozone officials called off an emergency meeting of finance ministers to approve a €130bn bail-out for Greece. Traders latched on to comments from Zhou Xiaochuan, China’s central bank governor, who reiterated a previous pledge from premier Wen Jiabao that Beijing was prepared to help Europe tackle its debt difficulties. This has caused the single currency to rally 0.3 per cent to $1.3162, a move that ignited bullish sentiment across the risk asset spectrum. The FTSE All-World equity index was up 0.6 per cent and commodities were mostly in demand. Copper was adding 1 per cent to $3.85 a pound and Brent crude was higher by 0.6 per cent to $118.01 a barrel. Europe’s FTSE Eurofirst 300 opened higher by 0.4 per cent.
Many risk asset benchmarks were trying to consolidate near recent highs as the optimism released by improving manufacturing data continues to reverberate across global markets, the FT reports. S&P 500 futures suggested Wall Street would open little changed, and the FTSE Eurofirst 300 was up just 0.1 per cent, a fractional gain that nevertheless took the index to fresh six-month highs. Risk appetite was not entirely dominant, however. Copper was seeing profit-taking after its good run, losing 0.7 per cent to $3.82 a pound, while the euro was down 0.1 per cent to $1.3142 and the dollar index was up 0.1 per cent. The single currency was off its lows after a €4.6bn auction of Spanish bonds and a €8bn sale of French paper both saw good demand. Still, gold is up 0.3 per cent to $1,748 an ounce and haven Treasuries were softer, pushing 10-year yields up 1 basis point to 1.84 per cent. The FTSE All-World equity index was advancing 0.2 per cent to its best level since the start of August. The barometer has gained 21 per cent since its October intraday low and was up 7.4 per cent so far this year.
Traders’ focus turned from the eurozone to China, where GDP data and government efforts to bolster the stock market triggered a 4 per cent surge in Shanghai and a broad rally across Asia, the FT reports. The FTSE All-World equity index was up 0.9 per cent and gold gained 1.3 per cent to $1,665 an ounce. European bourses joined in the fun, with the FTSE Eurofirst 300 adding 0.8 per cent. US equity futures suggested Wall Street’s S&P 500 would greet the opening bell with a 1.1 per cent pop, taking the benchmark above the 1,300 level for the first time since August. There was a broad “risk-on” mindset sweeping dealing desks. Assets that tend to display a high beta to global growth hopes were seeing demand, with the Australian dollar was up 0.9 per cent and copper surged 3 per cent to $3.74 a pound.