Copper miners have a big problem.
You can call it “phantom inventory” or the “carry trade” but it relates to the same thing — no-one knows how much copper China is really using.
It’s because copper, like other metals, is used as collateral for easy financing deals in China.
Businesses get funding from banks at a low interest to import the metal to China, then use it as collateral for a high interest rate account at a Chinese bank, rather than using it make anything.
“It’s free money,” Ken Hoffman, a senior analyst at Bloomberg Intelligence said on Wednesday.
Or at least it was. It’s harder to get a high yielding account in China these days, and currency fluctuations have eaten into carry traders profits.
It means there’s a whole lot of inventory that people think is being used to make things like cars, but is really just sitting there, ready to flood the market.
There are no stats on how much copper is used this way, but it could be higher than 70% of all imports into China. Hoffman said his team crunched the data and could find only 24% of imports appearing in car and goods manufacturing. The rest is simply listed as “other.”
Glencore is particularly frustrated by this lack of data. Its fortunes, and stock price, are closely tied with how the metal performs on the market.
The company is shedding copper mining assets in an effort to cut costs and boost the price of the metal.
Glencore said in a statement on Monday that it is offering up its Cobar mine in Australia and Lomas Bayas mine in Chile for sale after “receiving a number of unsolicited expressions of interest for these mines from various potential buyers.”
“When [Glencore CEO] Ivan Glasenberg says no-one understands the Chinese market, he’s right,” Hoffman said.
The worry is that once the carry trade is no longer profitable, the market will be flooded as people look to sell the metal they have been using as collateral.
This chart from Citi also shows just how closely Glencore’s fortunes are tied up with the copper price:
As known unknowns go, it’s a pretty scary one.