Friday, April 29, 2011

China: Copper In, Copper Out

We have written on several occasions how copper is being imported into China, placed in bonded warehouses, and used as collateral to gain access to credit.  This has led to a significant rise in copper prices.

The bonded warehouse inventories of copper are actually up despite less copper imports in China.  This means there may be no real demand for the copper other than as collateral and that it could constitute an oversupply which could negatively affect prices with destocking.  It appears that a variety of Chinese businesses, including possibly property developers, have been using copper in bonded warehouses for collateral.

As the holders of these copper inventories find it harder to rollover financing, they are responding by re-exporting copper in larger quantities to the extent that copper exports surged to 36,800 tons in March.  The two most popular countries to which the exports are sent are Singapore and South Korea, both of which have LME warehouses.  Rather than meeting Chinese productive demand, it appears much of the imported copper is being re-exported after a monetization pit stop in Chinese bonded warehouses.  Since it was never sold to a mainland buyer no VAT applied and the import - export transaction is tax neutral.

If the copper is not to meet internal demand which has remained price resistant, this has a direct effect on analysts projections of GDP and on the market price of copper if the import - pit stop for loans - export cycle continues to trend towards less import and larger exports.

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