MetalMiner WIR: Copper Loan Shark Week and the DeLorean Experiment

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I can make you a great deal on a copper loan!

It’s hard to describe the last week in metals commodities. Nickel continued its inexorable climb toward $20,000 a ton. The platinum miners’ strike in South Africa shows no sign of ending despite nearing a full five months of disrupted production, but the rest was much more unpredictable. Nothing illustrated this more than the situation in copper, the long-suffering Job of metal commodities.

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Things were actually starting to look up for copper. After losing value for most of the year, copper sustained a small gain on the MMI by building on May’s gains with a 1.2% jump this month. Capacity started to dry up. LME prices were up on positive Chinese factory data. It really seemed like copper’s problems were finally being solved by good ol’ supply and demand.

Then the rug was pulled out from under copper in an incident we’re calling:

Copper Loan Shark Week!

I can make you a great deal on a copper loan!

I can make you a great deal on a copper loan!

As if in the aftermath of an attack by Jaws, copper was blindsided, recording one-month lows and six-week lows just as quickly as it seemed to have turned around. What happened?

For years, our friends in China have been using metals as loan collateral. MetalMiner Editor-At-Large Stuart Burns accurately explained that the problem is that funds secured from long-dated letters of credit issued for the import of certain commodities and collateralized on the value of those commodities had been used to make loans at higher interest rates to organizations that could not normally borrow at commercial rates from the banks.

This is a form of loan sharking without that whole broken-legs-if-you-don’t-make-your-payments thing. A loan is made at a predatory (shark!) rate to an organization that simply cannot borrow the money anywhere else and is dependent, entirely, on the shark lender.

What’s worse, is it is believed that funds have been used for interest rate arbitrage. The commodities involved have in some situations been borrowed on more than once. Depending on how widespread the double-dipping problem is it could be another sub-prime mortgage crisis such as the one we went through here in the US in 2008 and China’s entire economy could be like a shark that’s not moving forward. While it’s not known which commodities held in warehouses are backing these loans, it affects copper the most because of its widespread use as bank collateral.

Stuart was nice enough to explain how the circling sharks in China affect western banks and other commodities as well.

Would that this was the only weird thing going on in metals markets this week. Nope, aluminum showed some strange price turns as well.

Alcoa Up, Aluminum Down?

Lead Forecaster Raul De Frutos explains that, historically, Alcoa stock and aluminum prices have been highly correlated. As aluminum fundamentals improve, the price of aluminum surges and that means more revenues for Alcoa, causing an increase in its stock price. Then why is aluminum down this year? Alcoa’s up, after all. It seems clear that there is a bright future for aluminum demand in the auto industry and it is luring investors to pour money into aluminum-related companies. Ahh, the auto industry, home of the aluminum-bodied Ford F-150, the most ambitious experiment in American motoring since the stainless steel body panels of the DeLorean.

While all of this price weirdness has an easy enough explanation, it’s a comforting thought that Ford, motivated by tougher CAFE standards from the National Highway Transportation Safety Administration, is at least trying something new and using non-traditional metals in an innovative way and investors are betting on Alcoa and Ford to make aluminum-bodied cars the next big thing.  DeLorean went heavier and tried the same thing with stainless steel in a bid to beat corrosion for the life of a car. Hey, if we wind up with another DeLorean at least we’ll get some great movies about the future, right?


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