One of the problems with cartel systems is that when they bust apart they tend to take out not just their own industry but all the other industries that have come to depend on their ability to keep things balanced in their favour.
In fact, best to think of cartels and monopolies as an “ecosystem”, which allow a whole range of different lifeforms to thrive on the back of their ability to keep things in a permanent goldilocked state of not too much and not too little control.
Small surprise then that the repercussions of Opec’s non cut last week have turned to wide-eyed realisation for some market participants that the price function in commodity markets has never really been about the fundamentals as much as the dedication of certain entities to “not sell” volumes when they have them to hand. Read more
Friday, November 28th. It’s the day after Thanksgiving in the US – possibly the lightest trading session of the year. And here, buried under the turkey leftovers, we find two statements (click to read) …
That’s the CME handing out disciplinary action against Mr Igor Oystacher, one of the biggest individual fish in the deep Chicago derivatives pond. He’s been landed with a $150,000 fine and a one month trading ban. Happy Holidays Igor! Read more
Decision time approaches for Mongolia, Rio Tinto and Turquoise Hill on Oyu Tolgoi, the enormous copper mining project that could one day represent about a third of the landlocked nation’s economy.
Since we reported that Mongolia’s yet to be created sovereign wealth fund could take an equity stake in Turquoise (which releases earnings after the close in Toronto on Tuesday), one deadline has been extended, the mining minister has done his best to wind up investors, China has reasserted itself and Tony Blair has popped up.
All of which means that a deal to start work on the underground part of the mine (phase II), funded by $4bn of loans by commercial banks and multilateral lenders, is very close. But it remains caught up in Mongolian politics, and may not hit the March 31 deadline on which the funding hangs. Read more
Deutsche: yes, copper financing in China is big.
How big? Try a tenth of all short-term FX loans — and 750,000 or so tonnes of metal in Shanghai bonded warehouses alone — big.
But then, they think it will mostly stay profitable… Read more
Right, so if we’re not blaming the squid we may as well spend a bit more time on China. Whack-a-mole finance can have a long reach after all and may very well be skewing LME copper price levels which, instead of reflecting the LME stock position, are maybe reflecting all of that copper sitting somewhere in China, often tied up in tricky financing deals in the shadowy sectors of the economy.
What remains interesting is the implicit and very sensible worry that all of that supply won’t stay under wraps forever. Read more
Following Matt Taibbi’s “Vampire Squid operates in commodities” exposé, here’s an apropos update on recent LME inventory declines from the evil one itself. As analysts at Goldman Sachs noted on Friday, it looks increasingly like copper inventory is heading off market into completely opaque stores in China as a result of renewed financing deals (CCFDs), rather than being depleted due to true market deficits:
We continue to believe LME inventory declines reflect stocks shifting off market rather than a deficit market, due to CCFDs and the impact of the new LME rules. Spread tightness in our view owes to the fact that CCFDs change copper from a negative carry asset (storage costs, financing costs) to a positive carry asset (where interest rate arbitrate > storage, financing, and hedging costs). Since we do not expect these deals to end anytime soon, LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in 2Q.
Which is a neat way of saying “don’t blame us for tight spreads, blame China”. And … “by the way, new LME rules aren’t working just as we predicted”. Read more
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