The WSJ reports,"copper spot prices have slumped 4% since reports that Chinese authorities are cracking down on traders who use metals such as copper as collateral for loans. The case is complicated by evidence that a trader may have used metal stored at the northeastern port of Qingdao as collateral for multiple loans, possibly defrauding several Western banks, including Standard Chartered and Citigroup.
There is a legitimate fear that traders might dump copper onto the market to pay back suddenly scrutinized loans. It also raises the worry that other assets across China, say, office buildings, also have been used to secure multiple loans, without lenders knowing they all hold liens on the same collateral".
"But unlike China's systemically important property sector, copper is unlikely to produce dire consequences.
"While transparency is sorely lacking in China's metal markets, analysts estimate that between 600,000 and 890,000 tons sit in bonded warehouses inside customs zones. That is at maximum equal to 4% of global supply this year, according to Macquarie's Vivienne Lloyd. If traders sell it all, there is no doubt copper prices would take the hit.
Yet it is hard to believe all these mounds of metal will get dumped. Ms. Lloyd estimates that 600,000 tons are held by parties who have endured credit squeezes before, or by importers who will actually use the metal instead of speculating with it.
That leaves 290,000 tons that could flow out of Chinese warehouses. At 1.3% of supply, that will have a more modest effect on copper prices. A crackdown on Chinese commodity financing in March, along with jitters about industrial growth, sent copper down 10% before it recovered. It is possible the latest selloff will prove fleeting as the raw copper finds a home in better-regulated warehouses in Singapore and Malaysia"".
"Unlike iron-ore prices, which are flailing under weaker Chinese infrastructure spending, copper is still needed by Chinese consumers for electrical goods and autos. Copper is globally oversupplied now, but demand will edge higher by 2017", says Deutsche Bank.
"Qingdao might be the tip of China's shadow-lending iceberg, and a reminder to investors to stay skeptical of China's financial system. But as for copper, it will likely gain back at least some of its luster".
