Copper and ore glut in China sparks concerns
Worries grow over market volatility as traders may use the stocks as collateral to obtain much-needed financing while credit supply dries up
Rising copper and record iron-ore stockpiles on the mainland, some of which were used as collateral to obtain financing by companies facing difficulties getting credit, pose a substantial risk if those inventories are suddenly dumped on the metals market.
Whether and when the stock would unwind to normal levels, and whether this would happen in an orderly manner, depended on Beijing's credit supply and regulatory policies, and whether fundamental demand would pick up as market participants hoped, analysts said.
"The inventory build-up has not reached crisis level, but if the credit tightening worsens, it may trigger traders to trade stocks for cash rapidly and cause some volatility," said Helen Lau, a senior metals and mining analyst at UOB Kay Hian.
"I'm not too worried at this point since Beijing may have some indication in next month's parliamentary meetings on credit policies, and March usually sees a seasonal pickup in metals demand, which may reduce the stock."
A few years ago, the backwardation or premium in spot copper flared out to as high as US$100 and this prompted delivery of up to 100,000 tonnes of copper in a single month at that time.
Despite slowing economic growth, the mainland's imports of copper products hit a record 536,000 tonnes in January, up 53 per cent year on year, customs data showed. The jump is unusually strong, notwithstanding State Grid Corp saying it planned to spend 13 per cent more on power grids this year. The regional power distribution monopoly is the country's largest copper consumer.
Inventory at warehouses monitored by the Shanghai Futures Exchange stood at 194,111 tonnes on February 21, up 59 per cent from January 10 and its highest level since May 10 last year, the exchange said.
Barclays analyst Cheng Sijin estimated stocks at other bonded warehouses rose to 600,000 tonnes in January from 525,000 tonnes in December. No official figures are available.
This coincided with a sharp decline in copper stock at warehouses approved by the London Metal Exchange, where most of the world's copper is traded, as the metal was apparently sucked into the mainland. It fell 60.4 per cent to 276,400 tonnes on February 25 from June last year.
CLSA head of resources research Andrew Driscoll said: "There seems to be anecdotal evidence that some of China's recent commodity import strength relates to financing deals. History suggests that the government will move to curb this before excesses become too large, so we would not expect a disorderly unwind."
An analyst at Phillip Securities is less optimistic. "Using metals as collateral for borrowings has been around for years, but given the recent tightening in lending to the overheating property sector and greater scrutiny on trust loans and other shadow banking products, Beijing seems more determined to tighten risky lending," the analyst said.
Besides copper, stocks of imported iron ore also rose to levels unsupported by weaker fundamentals.
Despite slowing growth in steel output, iron ore piled at major mainland ports touched a record 100.9 million tonnes on February 21, Reuters cited data from Steelhome, an industry consultancy.
A Standard Chartered Bank research report forecast the mainland's steel output growth would slow to 3 per cent this year from 7.5 per cent as the focus of economic growth was steered away from fixed-asset investments towards services, while domestic ore was expected to gain market share from imports.
Tight credit in the fourth quarter has affected even a prominent metals trader.
General Nice Development, the mainland's largest privately owned steel-smelting and raw materials trader controlled by Cai Suixin, failed to complete an agreement in November last year to pay HK$811.8 million to buy shares of Hong Kong-listed IRC, a Far Eastern iron ore miner targeting the northeast mainland market.
"Much of the imports were likely driven by financing as tight monetary conditions persisted in the fourth quarter and [borrowing interest] rates rose," Cheng said. "Higher borrowing costs also encouraged financing imports to turn copper into credit, despite weaker Shanghai prices [that have] kept the spot [market] import arbitrage [window] shut."