SHANGHAI, Apr. 25 (SMM) – In bonded areas of Guangdong and Shanghai, some traders used copper as a financing vehicle to obtain loans with letter of credit. Some 0.8-1 million mt of copper is used as financing vehicle. Industry insiders believe such kind of financing is often seen against a backdrop of tight liquidity, and some short-term loans were finally used in other sectors, such as property markets.
Domestic copper prices have fallen more than 10% since mid-April. As additional margins are required for the copper pledged for loans, some market players worried that the rising financing costs will result in higher risks for capital shortage which may negatively affect banks. Sources revealed that government authorities are conducting surveys to some copper traders for the issue.
Hedging Trade Necessary to Avoid Capital Shortage
According to a large copper trader in Yunnan, most large traders conducted hedging trade due to the slumping copper prices to contain risk. An institutional investor also said some traders started to sell the copper used as financing vehicle for entrepot trade and some goods began entering into domestic markets.
Few traders were prepared for any sharp decline in copper prices when prices fell nearly RMB 6,000/mt since April 15. But what has resulted in such a plunge in copper prices? Market players believe this was influenced by the tumbling commodities and precious metals. Besides, the depressed demand in China and record high copper inventories reported by SHFE and LME also place great downward pressure on copper prices.
Copper traders were directly hit by the falling prices. According to the Yunnan-based copper trader mentioned previously, companies using copper as financing vehicle are required to pay 20-30% of margins, and banks will raise the margins or advance the deadline for repayment when copper prices fell. In this context, companies can avoid risk by hedging, but companies with no spot copper at hand may come under great risk and face a shortage of fund.
Lei Lianhua, analyst of Fubao said the decline in copper prices will cause some companies to terminate their financing operation through copper prematurely, and these goods will flow into spot market, intensifying the oversupply.
Inventories at Bonded Areas Start Falling
SMM copper analyst revealed that copper inventories at bonded areas have fallen from 750,000 mt to over 600,000 mt, and most companies conducting entrepot trade for hedging or financing were mainly engaged in general trade so as to achieve the annual import volume required by banks.
SMM reported that spot goods available to the market have been declining since early March, as mainstream traders tended to purchase instead of selling goods. In this context, copper supply will be tighter and premiums are expected to rise.
Market players believe most traders holding long-term contracts will need to purchase spot goods to fulfill these long-term contracts, only a few traders of financial strength built inventories actively in Q1 at low premiums, with their stocks sufficient to fulfill the long-term contracts in the coming half year. This confirmed the report that 90% of copper in bonded areas is actually held by banks.
According to SMM, the rapid growth in premiums encouraged speculators. Some traders possessing 1,000-2,000 mt of copper held back from selling or raised premiums to over USD 100/mt, with most investors bullish to copper premiums.
In addition, some goods were delivered to LME warehouses. Some LME warehouses offered subsidy of some USD 100/mt to encourage traders to deliver goods. Besides, a part of stocks directly flew into domestic markets.
Nevertheless, Lei Lianhua said China’s refined copper imports dropped significantly due mainly to the rising domestic copper output and lower-than-expected domestic demand. Moreover, the noticeable decline in long-term contracts this year and falling prices which caused banks to tighten financing business through copper also drove down imports.
With respect to copper price trends, market players noted that copper demand was still depressed despite improvement in orders for copper semis producers. Furthermore, positions in futures market increased 100,000 lots to 920,000 lots, more than 100% over the number at the beginning of the year, but neither shorts nor longs showed intention of cutting positions, indicating the possible volatility in the future. Thus, companies should take measures to avoid risk.
Edited by SMM