Thursday, March 10, 2011

UPDATED: Uh oh: What's the Real Demand for Copper (a cupric currency conundrum)

Update: I was just reminded of another instance of commodity hoarding in China, reported a few weeks ago by the WSJ:
Chinese Take a Cotton to Hoarding 
Yu Lianmin, a cotton farmer in Huji, China, harvested 6,600 pounds of cotton this year. Despite record cotton prices, he didn't sell any of it....
Original post:
This could imply a huge misperception of global GDP and the growth thereof.
Back in December we linked to a hint of what was going on in "As Copper Hits Record Highs: "China’s bonded-warehouse copper mystery":
Some smart reporting from FT Alphaville....
The denizens of Alphaville are again tugging on a corner of the tapestry:

China’s copper as collateral addiction
On Wednesday, we drew attention to a Standard Chartered report which claimed that as much as 550kt of copper was stockpiled in bonded warehouses in Shanghai by late February — the majority of it being used as collateral for securing financing deals.
A clever inflation hedge, if you will.
The implications of such practices, however, are potentially huge for the global economy. Analysts, after all, keenly watch Chinese copper imports to determine the state of the global economy — specifically how global demand is faring.
Now, if Chinese copper imports are more about inflation hedging and financing deals than production demand, that dramatically changes the function of the data in ascertaining the health of the global economy.
While the whole copper as collateral story is not new, it still hasn’t penetrated market concsiousness deeply enough to change attitudes. It’s also still a story that relies on anecdotal evidence rather than cold hard facts, and consequently deserves a lot more investigation.
That said, among the anecdotal evidence that does exist is this rather illuminating Bloomberg story from February 23 — which seems to have slipped to the wayside. It echoes exactly the Standard Chartered view, while adding some important additional details.
Please note the emphasis:
Feb. 23 (Bloomberg) — Copper held in bonded warehouses in Shanghai has jumped as more traders import the metal to use as collateral to obtain funds, either for re-lending or to finance corporate development, according to analysts and traders.
Inventories have climbed to about 600,000 metric tons, said Zhao Kai, an analyst at the futures unit of Jiangxi Copper Co., China’s largest producer. Bonded warehouses are used to store shipments before duties are paid and official data on levels of holdings aren’t issued.
Last November, the total was 300,000 tons, according to a Scotia Capital estimate at the time. China has stepped up tightening measures as policy makers seek to avert overheating.
Traders in China can still use copper as collateral to obtain money from banks, which can then be re- lent to third parties, said Jia Zheng, a trader at Shanghai East Asia Futures Co.
“It appears that the practice of using copper to obtain financing is increasing as companies start to feel the effects of the tightening measures,” said Liang Lijuan, an analyst at Cofco Futures Co. “Imports have been surprisingly high.”
Imports of copper and its products by the world’s largest user were 364,240 tons last month, customs data shows. That’s the highest level since September and 25 percent more than a year ago. Copper on the London Metal Exchange, which rose to a record $10,190 a ton on Feb. 15 on speculation that demand will surpass supply, was at $9,518 at 12:46 p.m. in Singapore today.
And for the real clincher, Bloomberg states the bonded-warehouse holdings may now be almost four times the amount of copper tallied by the Shanghai Futures Exchange...MORE
I called it a currency conundrum because of something Ambrose Evans-Pritchard wrote in one of his lighter moods, "China Goes to Copper Currency Standard", a couple years ago [not because of the alliteration? -ed]:
...Finally an almost cheerful appearance from our terminally depressed friend at the Telegraph:
A 'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons....
If Chinese traders are using copper as a de facto currency it would mean that final demand is nowhere near what conventional wisdom would have it be. As Grandmother used to say, "When the initial condition for your macro model is 'the sky is falling' the appropriate course of action is to short sky. Do you like the potatoes?"

The Chinese are not shy when it comes to hoarding or the fungibility of  commodities vs. currency, see:
Commodities: "Is China preparing for a vampire attack?"

Copper Stockpiled by Chinese Pig Farmers May Be Liquidated   
The latter story was enough for the Russian representative of a major Swiss trading firm to begin dumping a large physical inventory of copper cathodes. 
For weeks he was muttering about "bleeping %$#*!@# Chinese pig farmers"