“People will only choose to import [copper] if the Shanghai-London arbitrage window opens; after all it’s not difficult to buy products from the domestic market,” market participants told Bulletin at the beginning of 2016.
According to Metal Bulletin’s calculations, the number of times the arbitrage window opened was firmly in the single digits this year, in line with previous years, with the best time for imports being typically before Chinese New Year when gap between on-shore and off-shore renminbi remains wide, creating opportunities in currency arbitrage.
However, customs data shows that China’s copper cathode imports still saw a 9.7% year-on-year rise to 2.8 million tonnes during the first ten months of the year.
While some of those involved in financing may not be importing copper solely for that purpose – many are attracted by the spread between the renminbi and the US dollar – import activities when the spread has narrowed or disappeared suggest that financing demand remains.
“It’s true that some people have already shifted to nickel or lead for financing, but copper still provides the best liquidity in the market; certain [financing] quota [for copper] remains,” one bank financing source said.
Besides imports, copper remains a popular choice for a number of banks in the warehouse receipt financing or repo businesses, another source said.
This is reflected in the large number of “unmovable” copper stocks in the Shanghai-bonded area. Copper stocks at these sheds have mainly remained in the range of 500,000- 600,000 tonnes this year, with more than half described as “unmovable” as they are linked to financing deals.
“Quite a lot of material was [retained in-warehouse] because spot premiums stayed below long-term contract prices; only if premiums go high enough will people [consider withdrawing it] from financing,” a source at a large trading house said.
Some banks which were negatively affected by the Qingdao investigation in 2014 are also gradually re-opening their metals repo businesses.
“We are [approaching this with caution], but the market is definitely improving,” one bank source said.
Who remains in the financing market?
According to a list obtained by Metal Bulletin of the major importers in China during the year, the top ten importers accounted for over half of the total import volume. Four of the ten are privately-owned firms, of which three are from China’s Shandong Province. Three state-owned enterprises were also on the list and another three are warehousing companies in the bonded area.
Other names on the list all indicated strong financing demand from the country’s privately-owned economies.
It is difficult to identify which firms have been withdrawing the cargoes from of the bonded warehouses.
The Qingdao probe in 2014 forced banks to tighten their risk control preferences – in some instances, more credit lines were offered to state-owned enterprises (SOE) than required to meet quotas.
In fact, the final recipients of many of the credit lines were privately-owned companies. SOEs are lending to some private companies who are unable to get financing from normal channels, according to a source at an SOE.
SOEs can easily get favourable yield rates by lending out their quotas, and can afford to be particular when choosing partners, given the possible default risks.
According to the list, six of the top 20 copper importers are based in China’s Shandong province, where the port of Qingdao is located.
“The financing environment [in Shandong] is even tighter than in other areas; at the same time the government sometimes needs financing to [strengthen] import trading data,” one major buyer in Shandong said.
A large number of letters of credit issued by Shandong-based banks were backed by the local government.
“Sometimes it’s a battle between the local government and the banks over good economic data versus well-controlled risks,” the buyer added.
Copper loses popularity among speculators
Meanwhile, copper has lost favour among speculators due to the narrow fluctuating range compared with other commodities, led by ferrous products.
With sufficient copper supply from the domestic market and an arbitrage window that remained largely shut this year, growing Chinese copper imports suggests demand from financing still exists.