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‘Canaries In Coal Mines’: Copper and Iron Ore Markets Breaking Down

Posted by Larry Doyle on March 12, 2014 10:23 AM |

Having focused meaningful attention on developments in China in recent commentaries, I am compelled to draw even further focus to the ‘canaries in the coal mines,’ that is, the copper and iron ore markets.

Let’s navigate eastward once again as the FT writes,

Copper continued to take a pummelling, with Shanghai traded futures in the metal falling by their daily limit on Wednesday morning.

That came after a frenzied day of trading on Tuesday, when copper prices sank below $6,500 a tonne to a near four-year low as concerns mounted over the fragility of the Chinese market.

In frenetic afternoon trading, prices tumbled more than 2.5 per cent to a low of $6,470. Since Thursday, copper for three-month delivery on the London Metal Exchange has tumbled by nearly $600, or 8.9 per cent.

On Wednesday morning, Shanghai traded copper futures fell 5.4 per cent, a fifth straight daily loss, to Rmb43,690 ($7,115) a tonne – the lowest since July 2009.

The slump in copper was sparked by China’s first corporate bond default on Friday, which has caused a reassessment of credit risk in the country.

Copper has become an increasingly popular source of collateral for Chinese traders who can obtain US dollar loans and profit from interest rate arbitrage. As a result, copper imports have rocketed in recent months, with much of the stock headed into warehouses rather than factories.

If the financing deals were to suddenly unwind, vast quantities of metal would pour into an already well-supplied market. China accounts for 40 per cent of global copper consumption, but demand in the physical market has been weak this year.

Tuesday’s reported suspension of trading of Baoding Tianwei Baobian Electric Co bonds and shares on the Shanghai stock exchange, because of mounting losses, added to the copper jitters, according to Stephen Briggs, analyst at BNP Paribas.

“The market is worried about what could happen in China, since financing deals have now become much less attractive,” he said.

Iron ore prices in China have come under pressure as mills that opened three-month letters of credit in December to tide themselves over during end-of-the-year credit tightness sold stock to repay their loans.

“The main problem is financing,” said Chen Yan, iron ore analyst with SteelHome in Shanghai.

Financing is always the issue especially when entities are excessively leveraged as many in China are.

I would keep a close eye on these commodity markets specifically and the ripple effect that they have on emerging markets generally and then developed markets beyond that.

Navigate accordingly.

Larry Doyle

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The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


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