If you’ve been following the copper story, you’ll know that Chinese warehouses have over the last few years been full of copper inventory (based on some on the ground research by Standard Chartered) which is also been used a main source of collateral for financing agreements by the Chinese businesses. According to GS, this has led to about 640-650kT extra copper being stores in chinese warehouses at its peak during end of April. Since then much of this inventory has been shipped back to LME warehoueses causing spreads to become unprofitable for financing deals.
As SocGen’s analysts wrote at the time:
"Deliveries of refined copper from China (a combination of SHFE, bonded warehouse and producer stocks) to LME warehouses in South Korea (mainly Busan) should reverse the downtrend in overall LME stocks. However, it could take a few weeks to see any substantial impact since processing of metal onto LME warrant will take time. Bonded warehouse stocks in Shanghai were estimated to have peaked at around 650,000t in April and have declined to around 550,000t currently, according to industry reports. The decline is being attributed to a combination of domestic consumer offtake and re-exports of copper overseas."
Here is some additional view from Caixa:
China has long been the world’s largest consumer and a net importer of copper, which makes exporting large quantities of the metal seem counterintuitive.
Yet Jiangxi Copper International Trading Co. Ltd. announced in May that it would join hands with other domestic traders and smelters and begin exporting refined copper, shipping it to transaction warehouses designated by the London Metal Exchange (LME).
The firm, a subsidiary of China's largest copper producer Jiangxi Copper Corp., said it will ship an undisclosed quantity over the next few months in lieu of cash to settle short-position contracts.
Hu Jianbin, Jiangxi’s chief analyst, said the trading firm would lose money – about 1,718 yuan per ton – on the deal. But it was a still a wise decision because selling the stocks at home would cost the company 704 yuan more a ton, he said.
This is what i think,
1) That Chinese companies are prepared to take losses on short positions taken out through the LME, presumably as hedges to long collateral positions in China.
2) That LME prices were preivously high based on the high inventory position in China and are coming down now given what is happening as a result of refined copper export by China.
3) Companies are choosing to make expensive Copper deliveries to close the short position indicating a cash/credit shortage in the industry.
Inspired by an article in (FT Alphaville, Izabella)