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, said.
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 default.
"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 & Metal.
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 trade.
"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.