China Copper Finance Threat Seen as Overblown by BofAAgnieszka Troszkiewicz and Juan Pablo Spinetto
Concerns that the copper market may unravel due to finance deals using the metal as collateral in China are overblown, according to analysts from Bank of America Corp. and Macquarie Group Ltd.
Copper for delivery in three months dropped 5.2 percent in March to the lowest since June 2010 amid fears that investors in China would be forced to unwind the metal used for loans amid concern about a weaker yuan and a government crackdown on shadow banking. China consumes almost half the world’s demand for the metal used in fridges and air conditioners.
The arrangements use commodities from iron-ore to soybeans to obtain credit and may tie up as much 1 million metric tons of copper, Goldman Sachs Group Inc. estimated in a March 18 report. Copper released by the potential liquidation of these contracts is likely to remain in China and not flood the international market, reducing the risk of a price collapse, Michael Widmer, head of metals research at BofA, said in an interview in Santiago during an industry conference this week.
“If financing deals are not rolled over or liquidated you’re putting them, in all likelihood, in the domestic Chinese market,” he said. “I just think the warehouse financing deals are not an issue.”
While China’s administration remains pragmatic, it has shown greater propensity for free market forces, Michael Lion, chairman of Sims Metal Management Asia Ltd., said in an April 9 interview from Santiago.
“If I was lending people money based on copper as collateral I’d be more nervous if I was Chinese doing that now,” Lion, who spent 40 years doing business in China, said.
Copper for delivery in three months gained 0.6 percent to $6,655 a ton on the London Metal Exchange yesterday, reducing a decline this year to 9.6 percent.
Refined copper imports into China fell 30 percent to 279,293 tons in February from a two-year high in January. Bonded copper stockpiles in China, which aren’t reported, are about 820,000 tons, according to metals researcher CRU.
China’s financing deals would only be an issue if the copper price falls another 10 percent, London-based Colin Hamilton, head of commodity research at Macquarie, said during an interview at the conference.
“I don’t see a dramatic unwind of financing deals,” he said.