The investment world is buzzing about copper prices, and there’s good reason to pay attention, as those falling prices trace back to China — and a potential hard landing for its economy. For the first time since July 2010, prices for a most active futures contract HGK4 are trading below $3 a pound, according to data from FactSet. China is the major culprit for the price drop, as the country is one of the metal’s biggest customers and recent poor trade data have rattled the investing world. But the collapse in prices to their worst level in nearly four years isn’t solely about demand concerns. Overnight, the Chinese solar-energy company Baoding Tianwei Baobian Electric saw its bonds suspended on the Shanghai exchange after a second year of net losses spurred default fears. Such action would follow last week’s first default by a Chinese company on its onshore corporate bonds. The default worries have “shaken the foundations of the copper market which in China is used as much for financing transactions as for its commodity properties,” wrote Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management, in a note Wednesday. Wednesday’s session saw high-grade copper for May delivery falling as low as $2.91 a pound. With estimates that as much as 60% of China’s copper stock is used as trade collateral, there’s panic among copper investors who are worried about massive liquidation in the market, said Schlossberg. Over the years, copper’s value has expanded beyond its use as an industrial metal, and the commodity is now firmly a highly financialized product in China, said John Hardy, head of foreign-exchange strategy at Saxo Bank, in emailed comments Wednesday. He said the drop in copper prices “can be directly traced to the recent and obvious move by the Chinese regime to weaken its currency in order to slow the popularity of the U.S dollar/China yuan carry trade that was driving their currency stronger against the USD even as major [emerging market] currencies were recently weak.” Investors engaging in a carry trade borrow or sell low-yielding currencies to fund investments in higher-yielding currencies. As the dollar-yuan carry trade is being curbed, it appears large copper positions are being unwound, hitting those who were using copper as collateral and perhaps causing positions to be dumped, Hardy said. Why it all matters: because the “the general risk from here is that this move in metals prices further destabilizes the Chinese financial system and will raise concerns of a hard landing in China if the authorities can’t get ahead of the pressures and potential contagion effects this move is generating,” Hardy said. The traditional slowdown in downstream copper demand during China’s Lunar New Year was more pronounced this year than last, analysts at Barclays noted this week, though they said they expected gradual demand improvement in the peak season for the second quarter.
Posted on: Wed, 04 Jun 2014 02:48:00 +0000