When will I Cu again
Deutsche: yes, copper financing in China is big.The arb chart is actually numbered "8" and is in the center of the Alphaville presentation.
How big? Try a tenth of all short-term FX loans — and 750,000 or so tonnes of metal in Shanghai bonded warehouses alone — big.
But then, they think it will mostly stay profitable…
This is despite the trade’s apparent exposure to a fall in the renminbi against the dollar, and how copper futures are pricing in an unwind of this inventory at some point.
So here is Deutsche’s contrarian take — after “channel checks” by strategist Xiao Fu — that there is no unwind:
While some metals merchants could be subject to mark to market margin calls due to RMB depreciation, they might opt to do more transit trades to meet cash requirements rather than selling copper outright, although this may only last for a short period of time.
We believe that the recent sell-off is a combination of speculators trying to anticipate the unwinding of financing deals and a lack of buying in China due to sluggish real demand…
With the SHFE/LME arb moving deeper into negative territory (Figure 7) and higher costs associated with RMB, such trades could become less attractive. However, as long as the returns on the unsecured loan in CNY are sufficiently high, such trades could remain profitable....MORE
It, alone, is worth the price of admission.
