The Copper Market Meltdown Isn’t Just About China Slowing Down

The Copper Market Meltdown Isn’t Just About China Slowing Down

MAMTA BADKAR MARKETS  MAR. 12, 2014, 10:39 PM

Copper prices have been melting down.

Shanghai-traded copper futures fell over 5% on Wednesday hitting their lowest level since July 2009. Copper prices are down 8.2% in the last three trading sessions on the London Metal Exchange.

Copper prices took a beating on Friday after China’s first domestic bond default. Copper prices have also tumbled after Chinese exports plummeted.

But there’s more to consider than just that.

Some 60-80% of China’s copper imports have been used as loan collateral, tweetedDeirdre Wang Morris at CNBC. Robert Savage at Track Research argues along similar lines:

“Markets are divorcing themselves from the BRIC growth story of the last decade – some will blame the FOMC and the end of QE, others will point to the capacity in those former emerging markets reaching inflation levels – but there is something else. China credit.  The link of copper to the shadow banking world isn’t new or a surprise but its changing.”

Remember, a credit crunch sends money market rates higher. And at times like this, copper imports rise because companies use copper as collateral and find it easier to obtain copper-backed loans. In June of 2013, for instance as China experienced a credit crunch, we saw refined copper imports rise to a nine-month high.

Savage points to a Goldman Sachs chart from last year that shows that higher rates in China impact the copper import arbitrage.

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“The appeal of commodity trade-related financing deals in China appears to be waning,” wrote Caroline Bain at Capital Economics.

“LME copper prices have moved closer to Chinese prices, so removing the arbitrage opportunity, while the weaker renminbi is threatening to undermine the profitability of the deals.”

Bain doesn’t think the demand outlook for copper is entirely bleak, though she does expect prices to fall further.

“The Chinese government has pledged a 13% y/y increase in investment in the electricity grid this year,” writes Bain. “Furthermore, Chinese import demand has remained strong. Cumulative copper imports in the first two months of the year were still up by 41% y/y.

But some analysts argue that markets have the fundamental demand-supply story wrong and that copper prices could recover as supply remains tight, reports Simon Hall at the WSJ.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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