BEIJING ( Caixin Online ) — China has long been the world’s largest consumer and a net importer of copper, which makes exporting large quantities of the metal seem counter-intuitive.
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 ($271) 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 a ton more, he said.
Indeed, copper prices in China have been depressed for a while since the economy slowed, dragging down demands for copper in manufacturing and construction.
“Many enterprises that use copper as a raw material have suspended production,” Hu said. “Domestic copper prices are hovering at low levels.”
Meanwhile, prices of copper sold through LME remain much higher than late last year, contrary to many Chinese firms’ expectations, which means settling short positions would cost them money.
No wonder Jiangxi is “not the only one considering exporting copper for settlements,” Hu said.
Been there China’s official industrial policies discourage outbound shipments of copper by forcing potential exporters to first get government approval and then slapping each shipment with extra taxes.
Companies have found ways to get around government policy by exporting copper through the mainland’s bonded warehouses for imported copper, which is stored before it’s subject to duty fees, said a trader familiar with the practice.
A Standard Chartered Bank report said about 600,000 tons of copper was added to the stockpiles held in Shanghai’s bonded warehouses in March. Fu Peng, chief analyst at Galaxy Futures Co., said as of May these stocks may have swelled to 800,000 tons.
A sizeable amount of that warehoused copper — 90% according to Standard Chartered — has been locked up by banks. The banks accepted the commodity as collateral from companies that took out loans last year after the Chinese government tightened credit access to cool inflation.
But more than collateral demand is changing the copper climate. Speculation is playing a role as well.
Jiangxi has been one of many copper companies and independent speculators trying to profit from cross-market arbitrage, by, for example, taking short positions on LME trades, many futures traders familiar with the situation said. It’s a risky bet, though, that loses money if copper prices climb.
Hu said Jiangxi can back its shorts with physical copper, and thus can control any damage. But others in the industry are not so sure.
A source from within the company who declined to be named said Jiangxi went too far when it used its LME account to trade futures on behalf of subsidiary clients.
These positions, according to a source at China Nonferrous Metals Industry Association, were purely speculative because they lacked physical copper backup. And they could be costly: The price of a metric ton of copper for three-month delivery were around $7,700 in mid-May, down from more than $8,500 in earlier months, but still high above those during late last year.
Most traders in China stand to lose money under these conditions, said Sheng Weimin, a deputy research director at Haitong Futures Co.
“Many short positions held by Chinese traders were opened half a year ago and it would take a price below $7,000 per metric ton for them to break even,” he said.
Worse still, according to Hu, short traders can’t simply roll over hedge positions to cushion themselves because LME copper for two-day delivery is trading at hefty premiums over three-month delivery goods.
It’s feeling like déjà vu for many copper-exporting traders, who have been around awhile. They remember what happened in 2005, when a former star futures trader with China’s State Reserve Bureau, which oversees the nation’s strategic commodity supplies, speculated on copper futures and lost a lot of the government’s money.
Liu Qibing bought short positions on LME copper futures that eventually cost China $112 million, as settling positions forced deliveries of 66,280 tons to LME warehouses in Singapore and South Korea. Afterward, the government had to import high-priced copper to replenish stocks.
Liu was later convicted of rogue trading, and sentenced to seven years in jail.
Some analysts say Jiangxi and other Chinese companies have found themselves caught in a trap set by western trading houses such as the Swiss powerhouse Glencore International PLC, the world’s largest copper merchant by volume.
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