by Chris Becker
Following the ramifications of traders and dealers using the same stock of iron ore as collateral for multiple loans, it looks like copper is being used in a similar manner:
Chinese authorities have begun an investigation into allegations that several companies pledged the same copper and other industrial metals held at the port of Qingdao as collateral for loans to different banks.
Beijing is stepping up efforts to curb the country’s vast shadow banking system and the revelations could see a further clampdown on this lending practice, which have been a key part of the commodities trade – particularly in iron ore and copper – for years.
As these deals are being unwound it could lead the dumping of copper onto the market that would otherwise have been tied up in financing deals leading to sharply lower prices.
Copper fell sharply last week, following a weak-ish manufacturing PMI result for May, ending just above $3 a pound, but way below resistance at $3.17 as it maintains its bear market:
Is copper set to follow iron ore, given most of the speculative demand is reflected in perceptions of what is going on in China? Stockpiles in iron ore are rocketing, yet official levels of copper have been falling – or have they?
However, while deliverable stocks held by the Shanghai Futures exchange has dropped to 92,000 tonnes it is estimated that China’s unofficial copper stocks used in financing could be as high as 700,000 tonnes according to a new report by Capital Economics meaning the tightness in the market has been artificial.
While iron ore imports slowed to 77.4 million tonnes in May, down 7.2% and copper imports fell 15.6% from a month ago to 380,000 tonnes, year on year imports are still expanding at a rapid rate.
Should the stockpiles of iron ore of more than 110 million tonnes and the “off-market” copper warehouse inventories be released, both commodities have further to fall.
Capital Economics reckons copper will be at $2.63 pound by Q3 and iron ore at $90 per tonne – not a bright outlook for Australia’s Terms-of-Trade, or indeed any copper (and gold) miners.
For stock markets, a capitulation in Dr.Copper could be the catalyst for a seasonal mid-year correction – or the start of something worse as the true level of demand in this key metal is revealed.