China port probe unlikely to break copper market

June 12, 2014 06:11 AM

China’s probe into metals warehousing at Qingdao port is unlikely to break the copper market, while it may depress prices in the short term, according to Bank of America Corp.

Officials are investigating whether metal stockpiled at Qingdao fell short of collateral obligations used to secure loans. While copper may be released into the market as banks’ tightening of lending causes some deals to unwind, the amounts in Qingdao are equivalent to less than a day of Chinese demand, the bank said in a report.

“We believe the tonnages involved in financing deals, especially at Qingdao, are not big enough to break the copper market,” London-based analyst Michael Widmer wrote in the report dated yesterday. “Yet, liquidity available for financing deals may decline especially for speculative transactions.”

There’s a “high probability” listing copper that didn’t exist for collateral purposes also happened at other ports, Widmer wrote. Still, the market knew about under- collateralisation of some financing deals “for months” and that has prevented copper from declining more sharply, he said.

Copper fell 2.6 percent in June amid concern that deals using copper as collateral may start unwinding and more metal may become available to the market. The metal for delivery in three months traded 0.3 percent lower at $6,670 a metric ton by 12:22 p.m. on the London Metal Exchange.

About 300,000 to 400,000 tons of copper out of 800,000 tons in bonded stockpiles is held in financing deals, Widmer said, with some 90 percent of bonded inventory in Shanghai used for financial arbitrage in 2012. Qingdao, the third-biggest port in China for copper imports, shipped just under 230,000 tons of copper in 2013, or about 10 percent of the amounts arriving via Shanghai.

Copper financing

Speculative financing of copper and other commodities by non-commercial market participants to obtain loans proliferated since 2012, Widmer said. Metal is also being financed by industrial users and these transactions will remain “an essential part of the market” and “bread-and-butter of banks and commodity exchanges.”

Banks pulling out of inventory financing entirely would be “extremely bearish” as most of as much as 400,000 tons of copper being financed would end up on the domestic market and the LME, Widmer wrote. This scenario is unlikely, he said.

China’s State Reserve Bureau, the government stockpiling agency, is checking to ensure its copper purchases are free of collateral risks, people with knowledge of the matter said. Banks including Standard Chartered Plc, Citigroup Inc. and Standard Bank Group are also reviewing potential fallout from Qingdao.

“China’s economy and hence metal demand have been facing headwinds and compared to these issues, Qingdao is somewhat less significant,” Widmer said. Copper will average $6,500 in the second quarter, he added.

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