* Financing demand for copper ebbs on credit fears
* Up to 80 pct of copper imports could be for financing
* Oil, equities unscathed by bond default
By Melanie Burton and Susan Thomas
SYDNEY/LONDON, March 11 China's first domestic
bond default has shaken the foundations of the copper market,
stoking investor worries that financing deals that have locked
up vast quantities of copper could unravel.
This anxiety has led to three days of heavy selling in
copper, while having little noticeable effect on other global
The Shanghai Futures Exchange's most-traded copper contract
reached its lowest level in more than four years on
Tuesday, and the London copper benchmark fell to its
lowest in more than three years later in the day.
"A lot of that is linked to the financing deals and you
start to wonder are they at risk, and I think that is what the
market is indeed worried about, and that's why copper has taken
the brunt," BNP Paribas analyst Stephen Briggs said.
The default on a bond payment by China's Chaori Solar last
week signalled a reassessment of credit risk in a market where
even high-yielding debt had been seen as carrying an implicit
On Tuesday, solar panel maker and power company Baoding
Tianwei Baobian Electric Co Ltd announced a second
straight year of net losses, leading to a suspension of its
stock and bonds on the Shanghai Stock Exchange and stoking fears
that it, too, may default.
The metals markets saw the default as a sign of tighter
credit to come for users of metals and for financiers that have
used the metal as collateral for borrowing, analysts said.
If their loans are not renewed and financing deals start to
unravel, the investors could unload their metal supplies on to
Similar financing deals are in place using metals such as
zinc and iron ore, but copper has been the preferred choice for
the Chinese trade and finance community.
"If there are worries in a general sense about financial
conditions in China, copper is perhaps more exposed to that than
other metals, because we've seen a substantial rise in
inventories in China this year," Briggs said.
At least one U.S. scrap copper trader has suffered "large"
losses after the Chinese default, one of the first signs that
sinking prices and tightening credit are taking a toll on the
Some analysts and traders estimated that 60 to 80 percent of
China's copper imports in recent years may have been used as
collateral, although none of them could give a definitive figure
for how much copper is now tied up in deals.
The mainland's imports of copper products hit a record
536,000 tonnes in January, up 53 percent year on year, customs
data showed. The inflow slowed in February to 379,000 tonnes but
was still higher than in February 2013.
NO REAL DEMAND
Copper stocks in warehouses monitored by the Shanghai
Futures Exchange are bulging, up 65 percent since early January
to around 200,000 tonnes .
Another 745,000 tonnes of the metal is held in bonded
warehouses, minerals consultancy CRU estimated. No official
figures are available.
"Given rising inventories, a negative arbitrage and a
seemingly soft post-Lunar New Year increase in activity, we
doubt that real demand lies behind the strong copper numbers,"
Credit Suisse said in a research note.
Benchmark Shanghai and London Metal Exchange copper prices
have been falling steadily this year mostly because of tepid
economic growth in China, which accounts for more than 40
percent of global demand for the metal.
But after the sharp price drops in recent days following the
bond default, would-be importers in China are finding it tough
to get credit.
"Right now it is very difficult for clients to issue an LC
(letter of credit) to import copper because the bank loan is
very tight. Also if you import the copper in China, you will
lose a lot of money," one trader in Singapore said.
A lot of the money raised in the financing deals has been
invested in China's real estate market.
But the falling yuan and China's cooling property prices
have already started to eat into profits of some financing
deals, analysts said. The yuan fell by 1.42 percent from
mid-February to March 5, when it hit its lowest in more than six
months. It has since pared some of the losses.
Some economists say that by letting interest rates fall and
simultaneously forcing the yuan down, Beijing is conducting a
short-term attack on speculators, who have been pouring money
into China to cash in on a rising yuan and high yields on debt.
"People appear to be worried that China is getting real
about credit and that in such an environment, industrial demand
growth for copper will be less," said an analyst at a global
commodity trading house who declined to be named.
"With slower demand growth and possible liquidation of
surplus metal units from financial arrangements, people are
worried about the short-term demand outlook for copper."