| NEW YORK, March 11
NEW YORK, March 11 At least one U.S. scrap
copper trader has suffered "large" losses after a buyer in China
defaulted on a deal in the past week, one of the first signs
that sinking prices and tightening credit are taking a toll on
the physical market.
The customer walked away from a deal that had been
guaranteed by a letter of credit, said a market participant who
was familiar with the matter, but withheld the identity of the
companies involved to protect business relationships. China is
the world's biggest copper consumer.
Other traders in the U.S. scrap market said they had heard
of similar defaults starting to crop up as a rout in copper
prices prompts Chinese buyers to shred contracts with U.S.
suppliers, reviving memories of the wave of defaults that
shattered trust in the market after the 2008 financial crisis.
The feverish speculation comes as China's first domestic
bond default has triggered one of copper's steepest drops in
years. Prices have tumbled 9 percent in the past week, with the
most-active May contract on COMEX sinking to $2.942 per
lb on Tuesday, its lowest in almost four years.
Scrap deals are more prone to so-called wash-outs than
refined metal and concentrates trade typically handled by larger
firms, limiting the potential damage for now.
But if confirmed, it would be the first concrete sign that
tightening credit and fears about demand may have forced
fabricators, which use lower-priced scrap as an alternative to
cathode to make wiring and plumbing products, to reassess their
raw material needs.
"Copper was Bitcoin for China. The game's over. There's a
huge excess of copper that's just not needed," Herbert Black,
owner of Canadian scrap metal merchant American Iron & Metal,
On Tuesday, a senior executive at Jiangxi Copper Corp said
customers have not cancelled any term shipments.
The fears are particularly acute for exporters in the United
States, which is by far China's biggest scrap supplier,
accounting for a fifth of the country's 4.4 million tonnes of
copper scrap imports last year. U.S. imports were double that of
Hong Kong, which was ranked second.
As much as 15,000 tonnes of No. 2 copper scrap, a relatively
high grade of scrap with about 95 percent copper content, could
be stranded in China as a result of the default, the first
market participant said.
That would equate to more than 20 percent of China's copper
scrap imports in January.
"Some companies in China never got their new loans so they
can't open up their LCs (Letters of Credit)," said a trader who
exports scrap and cathode to China and had also heard of the
"It'll be a who's who of traders" who get hit, he said.
MEMORIES OF 2008
Talk of defaults rekindled memories of 2008 when prices sank
60 percent in just four months between September and December at
the height of the global economic crisis. Prices ended that year
at around $1.30 per lb.
Copper's fall is thus far modest by comparison, but contract
disputes in China reached epidemic levels as fabricators that
use high-grade scrap as an alternative to cathode to make wiring
and plumbing products sought bigger discounts, complained about
the quality of the material or walked away from deals.
Since then, those who were burnt have secured deposits
before they will let a shipment leave the United States, but
talk of defaults will damage counterparty trust.
"If you didn't get money upfront, you're in trouble. I think
prices are going to fall further," said Black of American Iron &
He said his contracts for thousands of tonnes of scrap a
month are intact and he gets a 30-percent deposit and covers the
exposure on the futures market.
While the bigger players may be covered, any unwanted metal
will still need to find new homes, potentially roiling cathode
"We've been offered a lot of cathode lately. People say it
was month-end housekeeping but we're waiting for the next shoe
to drop," said a U.S. cathode trader.