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Copper price falls on Chinese concerns | Copper price falls on Chinese concerns |
(about 13 hours later) | |
It's called Doctor Copper because you are meant to be able to tell the health of the global economy from the way it behaves. | It's called Doctor Copper because you are meant to be able to tell the health of the global economy from the way it behaves. |
And at the moment copper is looking pretty sick. | And at the moment copper is looking pretty sick. |
The price of the metal has fallen for two weeks in a row, and reached $6,376.25 a tonne, a low last touched in June 2010. | The price of the metal has fallen for two weeks in a row, and reached $6,376.25 a tonne, a low last touched in June 2010. |
Analysts are blaming the decline, in part, on signs of weakness in the Chinese economy. | Analysts are blaming the decline, in part, on signs of weakness in the Chinese economy. |
On Thursday of last week the latest batch of numbers out of Beijing showed industrial production grew at its slowest pace for more than four years during January and February. | On Thursday of last week the latest batch of numbers out of Beijing showed industrial production grew at its slowest pace for more than four years during January and February. |
Meanwhile, retail sales and investment were way lower than expected. | Meanwhile, retail sales and investment were way lower than expected. |
So demand has shrunk, and copper prices have been hit. | So demand has shrunk, and copper prices have been hit. |
Stockpiles | Stockpiles |
But it's not just the Chinese slowdown that has caused the plunge in the price of copper - Chinese businesses have been using the commodity as collateral for their loans. | But it's not just the Chinese slowdown that has caused the plunge in the price of copper - Chinese businesses have been using the commodity as collateral for their loans. |
So with the first ever bond default in China, commodity investors are worried there may be a glut of the metal coming on to the market. | So with the first ever bond default in China, commodity investors are worried there may be a glut of the metal coming on to the market. |
Exactly how much copper is being held for collateral is uncertain. | Exactly how much copper is being held for collateral is uncertain. |
Yet there are warehouses in Shanghai that are simply stuffed with copper. Bonded copper stocks in China are estimated to be at about 725,000 tonnes. | Yet there are warehouses in Shanghai that are simply stuffed with copper. Bonded copper stocks in China are estimated to be at about 725,000 tonnes. |
And in recent months imports have been accelerating. | And in recent months imports have been accelerating. |
The country imported a record 536,000 tonnes in January, up 53% year-on-year - the February figure was a little lower, but that's still a great deal of copper at a time when the economy is gearing down. | The country imported a record 536,000 tonnes in January, up 53% year-on-year - the February figure was a little lower, but that's still a great deal of copper at a time when the economy is gearing down. |
No-one is certain about how much of this is being used for finance, but estimates vary between 40% and 50%. | No-one is certain about how much of this is being used for finance, but estimates vary between 40% and 50%. |
So when solar-equipment maker Chaori Solar defaulted on its loans, questions started to be asked about what would happen to all that collateral if too many other companies defaulted on any copper-backed loans. | So when solar-equipment maker Chaori Solar defaulted on its loans, questions started to be asked about what would happen to all that collateral if too many other companies defaulted on any copper-backed loans. |
The answer is there would be awful lot of people wanting to sell copper. | The answer is there would be awful lot of people wanting to sell copper. |
Overreaction? | Overreaction? |
Then just to make people more nervous, another Chinese solar energy company, Baoding Tianwei Baobian Electric, saw its bonds suspended on the Shanghai exchange. | |
It has had two years of losses now, and looks a short step away from default. | It has had two years of losses now, and looks a short step away from default. |
On Thursday Chinese Premier Li Keqiang talked about "unavoidable" defaults that lie ahead. | |
The era of easy state-backed credit is coming to an end, lenders are worried, and copper is paying the price. | The era of easy state-backed credit is coming to an end, lenders are worried, and copper is paying the price. |
Andrew Latto, senior analyst at research group Fat Prophets, says: "The copper price is dictated by China, it has 40% of the copper market. | Andrew Latto, senior analyst at research group Fat Prophets, says: "The copper price is dictated by China, it has 40% of the copper market. |
"And if they are determined to take these steps to allow the market to dictate the level of credit, then there is more scope for a downside, and that's what the market is worried about." | "And if they are determined to take these steps to allow the market to dictate the level of credit, then there is more scope for a downside, and that's what the market is worried about." |
Gayle Berry, director of base metals research at Barclays agrees, but says the markets were overreacting. | Gayle Berry, director of base metals research at Barclays agrees, but says the markets were overreacting. |
"It is something the markets are very scared of," she says, "but they don't really understand the complexities of the way trade is carried out." | "It is something the markets are very scared of," she says, "but they don't really understand the complexities of the way trade is carried out." |
She explained that financing takes place in two ways. | She explained that financing takes place in two ways. |
Copper is imported using a letter of credit, and then sold straight on to provide access to cash often for investment into real estate. | Copper is imported using a letter of credit, and then sold straight on to provide access to cash often for investment into real estate. |
The second method involves the selling of copper for a fixed period for cash. | The second method involves the selling of copper for a fixed period for cash. |
She says that the Chaori bond default has little to do with this sort of financing. | She says that the Chaori bond default has little to do with this sort of financing. |
She insists that the stockpiles of copper do have an eventual industrial destination - and that is what will determine the price. | She insists that the stockpiles of copper do have an eventual industrial destination - and that is what will determine the price. |
"We think prices will improve in the second quarter, which is the traditional time for a pick-up in copper consumption," she says. | "We think prices will improve in the second quarter, which is the traditional time for a pick-up in copper consumption," she says. |
"The government has signalled major increases in infrastructure work on the power grid - to increase its size by 10% - and that will provide a huge market for the stocks in Shanghai." | "The government has signalled major increases in infrastructure work on the power grid - to increase its size by 10% - and that will provide a huge market for the stocks in Shanghai." |
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