Tag Archives: copper

Turmoil in Chinese market

Last week in China, Shanghai Chaori Solar Energy Science & Technology Co. Ltd-one of the Chinese solar company confessed its inability to repay $14.6 million interest to the investors. This happened to be the first corporate bond default that occurred in the China mainland.

This time, the government and state-owned banks gave up their previous policy of bailouts and debt extension to ease defaults. According to the article on WSJ, the absence of actual defaults is leading to more risky lending practices and could cause more wasteful investments in industries that have already suffered overcapacity. To put restrictions on the shadow banking system in China, it is necessary for the government to stop supporting unregulated risky investment activities and lay the economy on the right track.

Yesterday, copper prices skidded to their lowest level since June 2010, also the prices of iron ore fell to its lowest level on Monday since 2012. This is because of several reasons.

First, the default last week brought down the faith of Chinese economy, some investors may expect more defaults after this first one.

Second, the slack of the growth speed of GDP leaded to the worries about the decline in demand of copper and iron. Mostly consumed by China each year, copper and iron prices are bellwethers of the Chinese economy.

Third, the pressure on the copper financing forced selloff of copper. Regulated by the strict lending standard, many companies used copper as collateral to get funding and use that either to import more copper or invest in high-earning assets. However, the fear of default and curb of demand transfer those copper from collateral into market, then the raise of supply pull the copper price down.

Those unwanted extra metal in the market has leaded to more worries about the large commodity such as oil. Brent crude for April delivery on London’s ICE Futures exchange was down 69 cents, or 0.6%, at $107.86 a barrel. On the New York Mercantile Exchange, light, sweet crude futures for delivery in April were down $1.40, or 1.4%, at $98.63 a barrel. This is because that China is the main force in emerging market countries that were hoped to increase demand for oil, according to the recent report from OPEC. On the contrary, gold price rose to a five-month high today due to the investor’s increasing demand for safe assets.

As approaching to the burst of the bubble in Chinese house market, those news showed that the government is starting its regulation over the unhealthy economy. In the short run, we may experience more turmoil in Chinese economy.

China’s Rush on Commodities: First Gold, Now Copper

In an earlier blog post I wrote about China’s recent rush on the world gold supply. It turns out that gold is not the only commodity China is buying up in large amounts. A recent article in the Wall Street Journal, “China Lights the Way for Copper,” suggests that world copper prices will rise mainly because of China’s mounting efforts to buy up the metal.  This comes as a surprise to a majority of investors who, worried about the health of the global economy, predicted that the price would fall in 2014. The surprise is not unwarranted even when looking at China alone. China’s economy has been slowing down recently, posting a 7.7% growth in GDP in 2013, down from 9.3% in 2011. Furthermore, the People’s Bank of China (PBOC) has been tightening access to credit across the economy.

In spite of these apparent warning signs, however, Chinese demand for copper is growing. As seen by this graphic, copper stockpiles in London Metal Exchange warehouses have steadily declined since mid-2013. Although most of the increase in price has been fueled by an actual increase in demand on the part of Chinese producers, some of the growth is due to big-fish investor speculation. As the article states, various hedge funds are betting on the price to go up. The bets are justified though. In the midst of a slowing Chinese economy and a reduction of credit access, “companies ranging from power-cable makers to home builders continued to use copper products at a brisk clip.” The article speculates that the main reason these producers haven’t cut down on copper demand is that many of them are state-owned companies who would naturally be less affected by the PBOC’s credit tightening.

China’s growing demand for commodities has been an intriguing topic of conversation in the past few weeks. Personally, I think it’s something the U.S. government and other already-powerful economies should not brush off. Access to reasonably priced commodities fuels growth in manufacturing and industry, one of the main catalysts for growth in an economy as a whole. Although many developed economies, the U.S. included, have been shifting from manufacturing-centric to service-centric, a China with vast control over the supply of the world’s precious metals is not in the best interests of the U.S., especially given the amount of American debt China already owns. Indebtedness to China + dependence on its manipulations of commodities markets does not make for a pretty picture for future U.S.-China relations. What do you guys think? Is China’s rush on commodities something other countries should be worried about? Why or why not?