October 22, 2013 / 9:53 AM / 6 years ago

Chinese traders using LME stock for copper financing trade -traders

* Renewed copper financing eating up available supplies -traders

* 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 (Reuters) - 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 registered warehouses.

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

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