We’ve already referred to the latest Reuters Metals Insider report on Thursday, but somehow we feel that the following is worth a special mention of its own.
That is, what happens when the government attempts to rein in innovative Chinese financing schemes like those using copper as collateral?
In one (hyphenated) word: Re-exports.
In other words, more copper shenanigans.
As Reuters explains regarding the accumulated copper stocks in bonded warehouses in China (our emphasis):
However, there is a flip side to this bonded stocks build. As the Chinese authorities clamp down on the practice of using copper as collateral to bypass tighter bank lending criteria, holders are finding it harder to roll over financing arrangements.
They are responding by re-exporting copper in ever greater quantities, a tax-neutral turnaround since VAT is only payable on imported copper at the point it is sold to a mainland buyer.
Exports, more likely “re-exports”, surged to a five-year high of 36,800 tonnes in March.
No surprise that the two most favoured export countries were South Korea and Singapore, both of which host LME warehouses. This contra-flow of metal is why net imports fell by a steeper 31 percent to 516,800 tonnes in the first quarter of the year. Buyer resistance to historically high prices is even more apparent in China’s refined tin trade. Net imports plunged by 64 percent to 1,910 tonnes in the first quarter. The shift in the pace of imports dates back to the start of Q4 2010, exactly coinciding with the surge in LME prices to a series of fresh all-time highs.
Which means, all that copper analysts assumed was satisfying Chinese demand has done anything but. If anything, a lot of it has been offloaded straight back to LME warehouses via a simple pit-stop in a Chinese bonded-warehouse (while it was monetised).
And it explains why LME stocks have instead been rising.
Glencore holds up to 80 percent LME lead stocks – sources – Reuters
China’s bonded-warehouse copper mystery – FT Alphaville
China’s copper as collateral addiction - FT Alphaville
Copper’s rise slowed by Chinese oversupply - FT