Copper has the nickname “Dr. Copper” because it’s such a fundamental industrial metal, and it’s price is a reliable economic bellwether.
More and more the price of copper is driven by Chinese demand.
But there’s been growing chatter, which FT Alphaville has been all over, that Chinese consumption/demand is not all it’s cracked up to be.
- More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry. Initially via a letter of credit and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40-80% of total bonded stocks. Our estimates are towards the upper end of this range.
- Property developers (or the property developing arms of conglomerates), appear to be behind the lions share of this type of activity, driven by an unwillingness by domestic banks to extend finance, or the imposition of interest rates of anything from 10-20% when they do. On that basis, interest rates on metal of LIBOR + cost of funding look very attractive indeed.
The latter is particularly interesting, as it suggests that developers (not surprisingly) have found a way around the PBOC’s efforts at clamping down on lending.
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