View: Hot Copper Shorts Burning Commodity Firms - Caixin Online

By staff reporters Wang Ziwu, Gu Yongqiang and Fan Junli 05.30.2012 16:08

As prices soar, Jiangxi and others say they've been forced to cover short positions by exporting

(Beijing)–China has long been the world's largest consumer and a net importer of copper, which makes exporting large quantities of the metal seem counterintuitive.

Yet Jiangxi Copper International Trading Co. Ltd. announced in May that it would join hands with other domestic traders and smelters and begin exporting refined copper, shipping it to transaction warehouses designated by the London Metal Exchange (LME).

The firm, a subsidiary of China's largest copper producer Jiangxi Copper Corp., said it will ship an undisclosed quantity over the next few months in lieu of cash to settle short-position contracts.

Hu Jianbin, Jiangxi's chief analyst, said the trading firm would lose money – about 1,718 yuan per ton – on the deal. But it was a still a wise decision because selling the stocks at home would cost the company 704 yuan more a ton, he said.

Indeed, copper prices in China have been depressed for a while since the economy slowed, dragging down demands for copper in manufacturing and construction.

"Many enterprises that use copper as a raw material have suspended production," Hu said. "Domestic copper prices are hovering at low levels."

Meanwhile, prices of copper sold through LME remain much higher than late last year, contrary to many Chinese firms' expectations, which means settling short positions would cost them money.

No wonder Jiangxi is "not the only one considering exporting copper for settlements," Hu said.

Been There

China's official industrial policies discourage outbound shipments of copper by forcing potential exporters to first get government approval and then slapping each shipment with extra taxes.

Companies have found ways to get around government policy by exporting copper through the mainland's bonded warehouses for imported copper, which is stored before it's subject to duty fees, said a trader familiar with the practice.

A Standard Chartered Bank report said about 600,000 tons of copper was added to the stockpiles held in Shanghai's bonded warehouses in March. Fu Peng, chief analyst at Galaxy Futures Co., said as of May these stocks may have swelled to 800,000 tons.

A sizeable amount of that warehoused copper – 90 percent according to Standard Chartered – has been locked up by banks. The banks accepted the commodity as collateral from companies that took out loans last year after the Chinese government tightened credit access to cool inflation.

But more than collateral demand is changing the copper climate. Speculation is playing a role as well.