After a series of warnings in Financial Times about Chinese use of copper as collateral for obtaining loans, Chile’s state-owned copper producer, Codelco, said that Chinese stocks of copper are “abnormally high and needed to be watched carefully”.

Codelco boss via Reuters:

 ”It’s not normal. There is something going on,” Codelco CEO Diego Hernandez told reporters. “Stocks are high and some people believe the stocks are being used as a financing tool. “The level of stocks is not particularly high compared to historical levels, but it’s a concern.”

About 700,000 tons of copper or about 4.4% of world’s copper output is now stockpiled in China of which 300K has been stockpiled in just 3 months of this year.
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Izabella Kaminska from Financial Times has been warning that these copper stocks are used by smaller firms as collateral to get loans from banks. She notes a report stating that for 2010, only 100K of copper was imported.

Kaminska cites traders who are saying that March copper imports were not on cash basis. She says that it is “best to stop describing copper as a commodity in China completely. It’s now seen just an ‘excellent’ form of collateral.”

Copper chart reflects these concerns with a noticeable head and shoulder formation. The price failed to clear crucial 450 level and we are looking at a retest of 410 which if breached could push down to the 200DMA near $380.

One obvious victim of this scenario is Freeport MacMoran (FCX) which looks like a sell on any rally.