Stanchart raises concern over businesses’ use of commodities to secure loans
By NEIL BEHRMANN IN LONDON
Chinese businesses are resorting to elaborate commodity financing to sidestep monetary tightening and higher interest rates.
Standard Chartered Bank is alarmed that China’s property developers, merchants and other businesses are buying copper and are using it as collateral to raise money which is becoming more expensive.
The bank has mentioned copper but commodity traders believe that similar deals are being negotiated with oil, other metals, cotton and grain. The financing deals have become a major contributing factor in raising China’s commodity imports, in turn contributing to price increases and rampant speculation in the country and elsewhere. An example of herd mentality and panic purchases of hoarders, is the highly unusual example of salt.
Hundreds of thousands of tonnes of salt were bought on fears that the Japanese nuclear plant disaster would pollute Asian supplies. Prices soared and plunged, leaving hoarders with nasty losses. The real concern, however, is the speculative price impact on energy, metals, cotton, other raw materials and foodstuffs.
‘Copper (a prime example) is seen as excellent collateral, rather than a commodity,’ Standard Chartered says. ‘Various sources tell us that companies that previously had no experience in metals trading have stepped up copper-buying in order to secure loans from banks.’
‘Domestic property developers are one example, given the difficulties of getting loans for project development. The cost of funding based on these (commodity) deals is low, compared with the yield generated by property sales.’
The findings of Standard Chartered and Standard Bank, a South African bank that is 20 per cent owned by Industrial and Commercial Bank of China, and several dealers, illustrate that the so called surge in Chinese physical consumption of copper, oil and several other commodities are a myth. Latest March figures show that copper imports jumped by 29 per cent, albeit down by 33 per cent on the year.
Standard Chartered and several metals analysts say that the copper is being stockpiled rather than consumed. The bank estimates that reported copper inventories in three major Shanghai warehouses have risen to more than 700,000 tonnes, up 28 per cent from 550,000 tonnes in early March.
Copper inventories at Shanghai Futures Exchange’s warehouses were around 172,000 tonnes early April, the highest level since May 2010 and almost a third higher than at the start of the year. The stockpiles worth almost US$7 billion at current prices, illustrate that the Chinese market is over supplied.
Steven Spencer, chief executive of Traderight, a commodity trading advisor, has been alarmed by the extent of commodity speculation in China and abroad. The basic reasons are excessive monetary easing of the US Federal Reserve Board, earlier Chinese monetary expansion and almost zero interest rates. Following four rate rises and a sharp increase in bank reserve requirements to 20.5 per cent at the central bank, the official lending rate is 6.31 per cent, but depending on the borrower, actual lending rates in China can be anything 15 to 25 per cent, traders report.
According to Mr. Spencer, the copper and other commodity deals comprise highly sophisticated financing. Borrowers involve foreign suppliers who then discount the borrowers’ letters of credit and generate US dollars for them. Even after swapping the dollars for renminbi, the money is much cheaper than borrowing in China.
‘The open secret is a secret no more; copper has gone to China for punting and financing and was called consumption,’ says David Threlkeld, president of Resolved Inc, a metals trader. He cautions that ‘Chinese authorities are scrutinising copper, and other commodities that are being used for off-balance sheet financing’.
Mr. Threlkeld estimates that the gross value of reported and unreported copper stocks in China and abroad is as much as US$30 billion to US$50 billion and that there are more than adequate inventories and supplies of other commodities. Major holders are hedge funds, unwitting pension funds and individuals who have been sold commodity index products and exchange traded funds while large and small bull speculative positions on New York, Chicago, London, Shanghai, Hong Kong and Singapore exchanges have soared over the past few years.
The global consequences of all these dealings could well be serious for players, banks and other participants when the balloon eventually pops, but the timing is unpredictable. Long term, a slide in energy and raw materials prices would be a booster for the global economy.
Guanyu, Thanks for the interesting article. Appreciates all your sharing.
Rdgs RnR
‘Copper (a prime example) is seen as excellent collateral, rather than a commodity,’ Standard Chartered says. ‘Various sources tell us that companies that previously had no experience in metals trading have stepped up copper-buying in order to secure loans from banks.’
3 comments:
Chinese turn copper into property gold
Stanchart raises concern over businesses’ use of commodities to secure loans
By NEIL BEHRMANN
IN LONDON
Chinese businesses are resorting to elaborate commodity financing to sidestep monetary tightening and higher interest rates.
Standard Chartered Bank is alarmed that China’s property developers, merchants and other businesses are buying copper and are using it as collateral to raise money which is becoming more expensive.
The bank has mentioned copper but commodity traders believe that similar deals are being negotiated with oil, other metals, cotton and grain. The financing deals have become a major contributing factor in raising China’s commodity imports, in turn contributing to price increases and rampant speculation in the country and elsewhere. An example of herd mentality and panic purchases of hoarders, is the highly unusual example of salt.
Hundreds of thousands of tonnes of salt were bought on fears that the Japanese nuclear plant disaster would pollute Asian supplies. Prices soared and plunged, leaving hoarders with nasty losses. The real concern, however, is the speculative price impact on energy, metals, cotton, other raw materials and foodstuffs.
‘Copper (a prime example) is seen as excellent collateral, rather than a commodity,’ Standard Chartered says. ‘Various sources tell us that companies that previously had no experience in metals trading have stepped up copper-buying in order to secure loans from banks.’
‘Domestic property developers are one example, given the difficulties of getting loans for project development. The cost of funding based on these (commodity) deals is low, compared with the yield generated by property sales.’
The findings of Standard Chartered and Standard Bank, a South African bank that is 20 per cent owned by Industrial and Commercial Bank of China, and several dealers, illustrate that the so called surge in Chinese physical consumption of copper, oil and several other commodities are a myth. Latest March figures show that copper imports jumped by 29 per cent, albeit down by 33 per cent on the year.
Standard Chartered and several metals analysts say that the copper is being stockpiled rather than consumed. The bank estimates that reported copper inventories in three major Shanghai warehouses have risen to more than 700,000 tonnes, up 28 per cent from 550,000 tonnes in early March.
Copper inventories at Shanghai Futures Exchange’s warehouses were around 172,000 tonnes early April, the highest level since May 2010 and almost a third higher than at the start of the year. The stockpiles worth almost US$7 billion at current prices, illustrate that the Chinese market is over supplied.
Steven Spencer, chief executive of Traderight, a commodity trading advisor, has been alarmed by the extent of commodity speculation in China and abroad. The basic reasons are excessive monetary easing of the US Federal Reserve Board, earlier Chinese monetary expansion and almost zero interest rates. Following four rate rises and a sharp increase in bank reserve requirements to 20.5 per cent at the central bank, the official lending rate is 6.31 per cent, but depending on the borrower, actual lending rates in China can be anything 15 to 25 per cent, traders report.
According to Mr. Spencer, the copper and other commodity deals comprise highly sophisticated financing. Borrowers involve foreign suppliers who then discount the borrowers’ letters of credit and generate US dollars for them. Even after swapping the dollars for renminbi, the money is much cheaper than borrowing in China.
‘The open secret is a secret no more; copper has gone to China for punting and financing and was called consumption,’ says David Threlkeld, president of Resolved Inc, a metals trader. He cautions that ‘Chinese authorities are scrutinising copper, and other commodities that are being used for off-balance sheet financing’.
Mr. Threlkeld estimates that the gross value of reported and unreported copper stocks in China and abroad is as much as US$30 billion to US$50 billion and that there are more than adequate inventories and supplies of other commodities. Major holders are hedge funds, unwitting pension funds and individuals who have been sold commodity index products and exchange traded funds while large and small bull speculative positions on New York, Chicago, London, Shanghai, Hong Kong and Singapore exchanges have soared over the past few years.
The global consequences of all these dealings could well be serious for players, banks and other participants when the balloon eventually pops, but the timing is unpredictable. Long term, a slide in energy and raw materials prices would be a booster for the global economy.
Guanyu,
Thanks for the interesting article. Appreciates all your sharing.
Rdgs
RnR
‘Copper (a prime example) is seen as excellent collateral, rather than a commodity,’ Standard Chartered says. ‘Various sources tell us that companies that previously had no experience in metals trading have stepped up copper-buying in order to secure loans from banks.’
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