By Jim Williams
“It’ll all blow up. Or it’ll all blow over.”
– Head of one LME brokerage
Copper futures opened the week lower on the London Metal Exchange based on concern over suspected fraud involving metals stored at a Chinese port.
Copper prices started falling last week, and continued that trend to start this week, after Chinese authorities opened an investigation into whether companies used the same copper, aluminum and iron-ore stocks held in the port of Qingdao as collateral for obtaining multiple loans.
The Qingdao reports began with word that authorities were blocking the shipment of some material from the Dagang terminal at Qingdao as they investigated the allegedly fraudulent use of warehouse receipts multiple times to raise finance.
The investigation focuses on allegations of double- or triple-pledged metal in a bonded warehouse in the Dagang port terminal of Qingdao.
The news hit Chinese copper premiums, which initially dropped by as much as $25.
“The driver to reduction in price and spreads is clearly associated with the duplication of warehouse receipts in the Chinese port,” says frequent tED contributor Michael Turek, head of the metals desk at NewEdge.
There has been concern that commodities in China are being used to get financing for cash-strapped companies. As credit tightens and the nation’s economy slows, some investors worry that the commodities will be dumped onto the market as banks seize collateral, potentially knocking down prices.
“Concerns over warehouse issues are weighing on prices,” says William Adams, head of research at FastMarkets.com.
Many investors expect China to gradually tighten restrictions on the use of copper as collateral, allowing companies to unwind these trades over a long period.
In other words, last week’s revelations could see a further clampdown on this type of lending practice, which have been a key part of the commodities trade – particularly in iron ore and copper – for years. Experts believe that as these deals are being unwound it could lead to the dumping of copper onto the market that would otherwise have been tied up in financing deals leading to sharply lower prices.
Some weaker-than-expected Chinese import data also weighed on market sentiment Monday, deepening concerns about the pace of economic growth and metals demand in the world’s second-largest economy.
We may not know where the price of copper will settle for a while, but we will keep an eye on the markets and trends and keep you updated.
China Qingdao port probe