* Renewed copper financing eating up available supplies
* Spot copper premiums up 13 percent in the past month
* Investors fear credit crunch prior to year-end
By Polly Yam
HONG KONG, Oct 22 Chinese investors who buy
copper as collateral for short-term loans have started using
London Metal Exchange warehouse stocks for the practice, driving
up spot market premiums amid fears of a year-end credit crunch,
traders said on Tuesday.
The increased purchases have reduced the availability of
refined copper in Asia, boosting prices, they said. Spot refined
copper premiums have jumped more than 13 percent from a month
earlier to $170-$200 per tonne this week, depending on origins.
Small Chinese companies have used copper imports for years
as a means to obtain finance, but a crackdown on the practice in
May came as regulators sought to stamp out fake trades and limit
the companies to trading bonded stocks in China.
The financing practice has been increasing again, though, as
some banks have started allowing companies to use copper stored
in LME warehouses and others are only allowing short-term
storage in bonded warehouses, traders said.
Local banks do not want to stop funding the copper trading
firms as it has generated profits for the banks, said a manager
at a large Shanghai-based copper importer that has not been
affected by the tighter scrutiny.
Demand for the financing trade was also increasing because
investors expect another credit crunch to raise domestic
financing costs before the end of the year, traders said.
"People want to prepare some cash because banks tightened
the credit prior to the year-end in previous years. Also, copper
price differentials have been not bad recently," a trader at a
large Western copper producer said.
He added that demand for financing imports by Chinese
investors should stay strong in the coming one to two months.
Traders said the practice of using the LME stocks in the
trade has further slowed the outflow of copper from the LME
In the copper financing trade, importers open letters of
credit (LCs) with banks, paying a portion of the metal's import
costs. The metal is then resold to obtain cash, which can be
used until the LCs are repaid in three to six months.
The copper can also be stored in bonded warehouses in China
and used as collateral for loans.
The premiums paid by buyers over the cash LME copper prices
to secure physical metal are still lower than the
four-year highs of $220 seen in July, when price differentials
between the LME and Shanghai Futures Exchange <0#SCF:>
were briefly favourable for imports.
China's refined copper imports surged 32 percent in
September from the previous month to a 19-month high at 347,305
tonnes, customs data showed on Monday.
(Editing by Tom Hogue)