(Adds byline and adds prices in paras 10, 11)
By Melanie Burton
SYDNEY, June 11 Worries over Chinese copper
financing are prompting some banks to wind up deals or stop
doing them altogether - and not just in the Qingdao port at the
center of a probe into possible fraud, traders said on
The focus, mostly from Western banks, is on so-called repo
deals, which give companies ready access to short-term credit in
exchange for goods, three trading sources and two banking
sources said. Repos is a shortening of repurchasing agreements.
Shanghai alone has an estimated 500,000-600,000 tonnes of
copper stored in bonded warehouses, around 2.5 percent of global
supply, so a partial unwind of these deals could have
significant impact on global liquidity and prices.
"The story driving the copper market is people using repo,
thinking they have no counterparty risk. Now all of them have to
think again. That changes the fundamentals of the whole market,"
said a trading source at a Western bank in Shanghai.
Three traders said that their repo financing business had
slowed down this week due to banks taking a more cautious
approach to granting credit, which was likely to drag on copper
prices and premiums.
"Right now, liquidity is very bad. Everyone wants to sell
(copper), but no one wants to buy," said a physical trader in
Singapore who sells metal in China.
"(Premiums) have already been dragged very low but they
could still fall further," he added.
In Shanghai, premiums to obtain physical metal dropped
another $10 to $70-$90 a tonne on Wednesday, according to China
price provider Shmet, down from $105-125 a week ago.
London Metal Exchange (LME) copper traded up by 0.1
percent at $6,680 a tonne, after hitting one-month lows the
session before, while in Shanghai copper closed up by 0.7
percent, fuelled in part by technical buying.
The cash-to-three-month backwardation, with nearby prices at
a premium to forward levels, widened on Wednesday to $58 per
tonne from $35 a day earlier.
Last week, concerns about the potential unleashing of metal
from financing deals had almost wiped out the backwardation,
with the spread narrowing to as low as $3 on Friday.
In a repurchase agreement, a commodity owner sells a
warehouse receipt and takes a short position on the underlying
commodity with a bank, while at the same time agreeing to buy
the deal back in anything from two weeks to three months.
A repo is different to an import financing deal, where a
Chinese firm typically opens a letter of credit with a bank for
imports and pays a deposit which varies depending on the credit
of the firm. The term is generally 3-6 months.
Both deals use warehouse receipts as proof of ownership and
banks have been scrambling to check their exposure since the
fraud investigation at Qingdao raised the uncomfortable prospect
that their metals holdings may not exist.
The probe at the Chinese port, where a third-party firm is
suspected of duplicating receipts for metal multiple times to
obtain financing, has shaken markets amid fears the problems
could extend to other ports and force a crackdown on using metal
as collateral for finance.
So far there are no signs that the practice has been more
widespread, but banks are still jumpy and checking their
warehouse exposure, said one head of commodity finance at a
South East Asian bank.
Banks are likely to raise the bar for Chinese commodity
financing deals in general, in order to broadly lower the
exposure to this sector, Goldman Sachs said in a note. That
could be done through raising funding costs, which would cut the
profitability of copper financing deals and release more metal
on to the market.
In March, the bank estimated commodity finance deals in
China were worth as much as $160 billion, or about 31 percent of
the country's total short-term foreign exchange loans.
"If there are further similar cases to be found, the whole
exposure could be reduced sharply, which would lead to a
disorderly unwind of repo and CCFD (Chinese Commodity Financing
Deals) business in general," it said.
Still, some market players expect financing appetite to
remain fairly steady, although it may incur higher costs, given
that a full scale retreat by banks would ultimately lose not
just their customers' business but also eat into their own.
"I don't buy the idea it's the end of copper financing or
that demand is going to collapse," the first trader said. "It
won't really change supply and demand, but it will change the
mechanism of the market."
(Reporting by Melanie Burton; Editing by Alex Richardson; and