China’s probe into metals warehousing at Qingdao port was unlikely to “break” the copper market, while it might depress prices in the short term, according to Bank of America Corporationsaid in a report.
While copper might be released into the market as banks’ tightening of lending caused some deals to unwind, the amounts in Qingdao were equivalent to less than a day of Chinese demand, the bank said.
“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 was 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 had 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.
About 300 000 tons to 400 000 tons of copper out of 800 000 tons in bonded stockpiles was 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.
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 London Metal Exchange, Widmer wrote. This scenario was unlikely.
“China’s economy and hence metal demand have been facing headwinds and compared to these issues, Qingdao is somewhat less significant,” Widmer said. – Bloomberg