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With Shanghai stockpile gone, copper market 'like a room full of gunpowder'

Section: Daily Dispatches

China's Billion-Dollar Cash-for-Copper Trade Grinds to a Halt

Alfred Cang and Jack Farchy
Bloomberg News 
via Yahoo News, Sunnyvale, California
Sunday, October 23, 2022

For the past 15 years the center of gravity of the global copper market has been a row of warehouses in Shanghai's free-trade zone where the Yangtze River meets the Pacific.

Traders from London to Lima would obsess over the flows in and out of Shanghai's huge bonded copper stockpile. It was the focal point for a multi-billion-dollar cash-for-copper trade, whereby Chinese companies would use metal as collateral for cheap financing. A cottage industry of analysts sprang up to estimate the size of what became the world's largest cache of copper metal.

... Dispatch continues below ...


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But now China's bonded warehouses are all but empty. The once-frenetic flow of metal into the stockpile has come to a juddering halt as two dominant financiers of Chinese metals, JPMorgan Chase & Co. and ICBC Standard Bank, have halted new business there. Numerous traders and bankers interviewed by Bloomberg said they believe the trade is dead for now, and some predicted the bonded stocks could drop to zero, or close to it.

The implications are being felt across the market as the world's largest copper consumer becomes more reliant on imports to meet its near-term needs at a time when global stocks are already at historically low levels. The Chinese copper market is at its tightest in more than a decade as traders pay massive premiums for immediate supplies.

For now, the miners, traders and financiers arriving in London this weekend for the annual LME Week jamboree are largely cautious on the near-term prospects for copper, given concerns about the global economy. But many in the market say they are braced for price spikes when the macroeconomic news eventually improves. And without its buffer of bonded stocks, any pickup in Chinese demand could have an explosive effect on the market.

"The physical market is so tight, it's like a room full of gunpowder -- any spark and the whole thing could blow," said David Lilley, chief executive of hedge fund Drakewood Capital Management Ltd. Without the Shanghai bonded inventory, "we are living without a safety net." ...

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