Copper financing scandal in China rocks world market

Despite being in a state of only a mild surplus in 2014, copper prices have witnessed a huge decline in the last 10 days, with the market falling below $6700 a tonne. LME cash copper fell by 3.3 percent for the week-ended June 6 and this week it has been trading at $6700-6750/t levels. The cause for the sell-off can be attributed to the whiff a serious financing misfeasance that has surfaced in China, the world’s largest consumer. At least one company is reported to have used fake documents for obtaining finances for much higher volumes than actually held in bonded warehouse. According to industry experts, the multi-collateralisation scandal has shocked lending banks; and so, many have turned cautious and have started to swiftly withdraw credit for bonded metal.

Price impact And now, bonded stocks that are unable to attract financing are leaving the warehouses, adding to the physical market supplies that in turn is seen pulling prices down. With marked constriction in the flow of credit, the market sentiment is shaken. The big question agitating market participants is how much of copper will flow out of the bonded warehouses and what will be the impact on prices. To be sure, bonded stocks have been building in China for the last several months. According to industry estimates, close to 900,000 tonnes of refined copper is held in bonded warehouses, mainly in Shanghai and smaller quantities at other centres. One such centre is Qingdao. The financing scandal has erupted in a warehouse in Qingdao which started to rapidly build stocks recently and by May its inventory level reached close to 100,000 tonnes.

There are fears that the detection could uncover fraud on a larger scale. Currently, the quantity involved is said to be about 20,000 tonnes, a minuscule quantity in relation to the world copper market of 22 million tons and normal stocks of about 1.2 million tons. However, industry experts assert that it is not the quantity, but the impact on lending that will hurt the market. The apprehension that credit withdrawal would mean larger outflows from the warehouses which will in turn augment near-term availability prompted the market prices to slump, they explained.

Downside risks The sentiment is so shaken that in the physical market, metal financing has all but dried up. Financiers are reportedly sending inspectors to warehouses for stock verification and audit. It is estimated that as much as 3000,000 tonnes of copper can potentially flow out of the bonded warehouses between June and September.

All this means, copper market faces downside risk from the current levels. In the coming weeks, prices could test the $6500/t levels. End-May copper traded at $6700/t and a year ago $7430/t. China’s copper financing problem has shades of the as yet unresolved commodity scandal and payment crisis at National Spot Exchange in our country. One is left wondering if China’s market participants drew inspiration from their Indian counterparts.

COMMENT NOW