China’s probe into metals stockpiled at Qingdao Port may spur the migration of copper to near-empty London Metal Exchange warehouses in neighboring countries as banks grow wary of lending money against commodities.
The investigation into whether a Chinese trader used the same batches of metals multiple times to get bank loans risks undermining the attractiveness of offering credit to companies that pile commodities inventory into bonded warehouses in China. Copper is among the major raw materials used in commodity-backed financing in the country, the biggest user of metals.
The CHART OF THE DAY shows copper at LME depots in South Korea, Malaysia, Singapore and Taiwan plunged 96 percent to 12,475 metric tons in the past year. The lower panel shows metal at bonded storages in China jumped 71 percent since last June to 810,000 tons through May, according to data compiled by Bloomberg Industries. LME stockpiles in Asia fell as demand for commodity financing attracted metal into bonded areas in China, said Yu Yi, a Beijing-based analyst with SDIC CGOG Futures Co.
“A certain amount will go into an LME-registered warehouse and receive an LME-registered warehouse warrant receipt, which is a lot more liquid,” said Vivienne Lloyd, a metals analyst at Macquarie Group Ltd. “The important fact is they have a very sturdy piece of documentation to say that this stuff exits and it hasn’t been over-collateralized.”
Traders may sell about 250,000 tons of bonded copper in China through September as it gets harder to secure financing amid the probe, according to a Bloomberg News survey this month. Copper in London slipped to a six-week low of $6,614.75 a ton June 12 on expectations that such an unwinding will add supply to the market. As much as half of 800,000 tons in bonded stocks is held in financing deals, said Bank of America Corp.
Some copper may be moved from China to LME warehouses in South Korea, and possibly Singapore and Malaysia, according to Jeremy Goldwyn, head of business development in Asia at Sucden Financial Ltd. The metal going into LME depots won’t necessarily be sold onto the exchange as the holders may retain ownership, Macquarie’s Lloyd said. “They will attempt to attract financing once again with a more reliable warrant receipt,” she said.