Wednesday, March 28, 2012

Copper as Currency

Copper was previously being used to sanitize official bank loans so that they could be used for banned purposes, like real estate development. Now the game is broader. Insight: China's copper traders play yuan for profits
At Shanghai's Waigaoqiao port, a sprawling 10 square kilometer free-trade zone, thousands of tonnes of copper cathode plates sit in stacks turning green after years of exposure to the elements.
These increasingly savvy financing deals mean that what used to be reliable metrics of regional demand, such as draws from copper stockpiles in London Metal Exchange warehouses and copper imports to China, have become muddied. They also mean the spread between the Hong Kong and Chinese yuan may be as important as China's industrial demand in determining imports.
"You can take an LC from one bank, pledge it to another bank and borrow against it from another bank to take advantage of a whole range of different rates," he said. "All we know is that we are selling a tremendous amount of metal to China for reasons that don't appear to be logical."
Financing deals draw in surplus metal from as far away as New Orleans, greased by low freight rates and rent at Shanghai bonded warehouses that is a quarter of storage costs in other global ports monitored by the LME. This has sucked the world's stock into China, tightening supply outside the country. As the global market moves into a small deficit this year, it has helped to firm premiums -- the price paid on top of LME contracts to get metal. This means when the world economy picks up, an auto parts maker in Detroit, or a copper tube maker in Hamburg may have more trouble securing metal and may face higher costs to do so.
Too much to excerpt. Read the whole thing.

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