Copper By The Numbers
Prices tumbled more than 2.5% to a low of $6,470 per ton. Since Thursday, copper for three-month delivery on the London Metal Exchange has tumbled by nearly $600, or 8.9%, the paper reported, while on Wednesday morning, Shanghai-traded copper futures fell 5.4%, a fifth straight daily loss, to Rmb 43,690 ($7,115) a ton – the lowest since July 2009.
Why the Freefall?
The problem for copper is two-fold.
Chinese traders have been importing unprecedented quantities of copper, largely not for consumption, but by taking out dollar loans and using the copper as collateral – this way, they can benefit from a lucrative interest rate arbitrage. It is feared that if the financing deals were to suddenly unwind, vast quantities of metal would pour into an already well-supplied market.
Weak trade data sent jitters through the market both last week and this week. The most obvious troubling data point being an 18.1% slump in China’s exports last month, worrying the markets that China’s growth is slowing faster than anticipated. In addition, the failure of a small solar equipment producer that defaulted on its debts raised the fear that cheap finance was coming to an end and credit lines were at risk, spelling the end of the arbitrage on interest rates.
Indeed, Beijing seems to have deliberately engineered a drop in the yuan and a rise in interest rates to give that message.
Rounding Cape Fear
But, as Andy Home in Reuters points out, fears are probably overdone, certainly on the trade data.
Chinese New Year this year came in early February, so this year was always going to compare unfavorably with last. Taken as an average, January and February combined are only down 1.6% compared to last year, poor for a market where we are used to constant rises, but not a catastrophe for an economy actively trying to steer towards more consumption and less commodity-dependent investment.
Estimates of China’s copper inventory are hazy, at best. The best guess, according to Reuters, is about 700,000 metric tons held in Shanghai’s bonded warehouse zone. In the past when inventory has become stressed, maybe by a negative arbitrage window, metal has readily flowed out the country and with a currently physically challenged global market – the LME is in backwardation with prompt delivery tightness – more metal would actually be welcome.
Not for prices, of course, hence the falls, but for short-term availability to consumers.
What This Means for Metal Buyers
The takeaway for consumers here is that prices have fallen, but underlying demand has not collapsed, neither in China nor globally.
Indeed, the price drops may be an opportunity to buy – although not yet. If metal starts to flow out of China, the current tightness will ease, the LME forward curve will flatten or even return to some form of contango, and copper prices will find a new floor.
In terms of true consumption, the copper market is in surplus, but the swing supply is not mines or smelters, it is precisely that Shanghai inventory that may yet end up at a port near you.