China copper stocks inching higher

China’s copper stocks at their Shanghai warehouse are expected to reach 650,000 tons in next few days, a level close to the last year’s just before the prices dipped.

“Local traders estimate some 80-90 percent of the stocks belong to trading houses using imports as a way to get cheaper financing,” reports Reuters.

In other words, vast amounts of copper are imported into China for reasons other then production, a phenomena that, illogical as it may seem, could reverse once China’s monetary policy gets fixed and market rates take hold.

“Traders have worked out some banks are smart at issuing LCs (Letters of Credit). Some issue them in yuan, some will issue them in U.S. dollars. You can take an LC from one bank, pledge it to another bank and borrow against it from another bank to take advantage of a whole range of different rates. All we know is that we are selling a tremendous amount of metal to China for reasons that don’t appear to be logical,” says an analyst at a Western bank with China operations, who declined to be named because he is not authorized to talk about the bank’s trading activities.

While a must-read explanation of what goes on in China with the metals trade says that all sorts of “enterprises” are speculating, the result is that vast amounts of metal has been brought into China to lay idly while the copper supply in rest of the world is characterized as tight, pushing up prices.

In other words, China’s copper demand is not based on its end use although the imports in the China are deemed as demand, assumed by most to have end use. At some point, there is a possibility that Shanghai may re-export all these vast quantities of the metal and sink the price.

Could this copper-collateral trade get bigger and consequently could the price go higher?

“Lured by the prospect of growing their commodities trading business, as well as expanding trade finance services, at least six major Western banks have set up local units in China, alongside a stream of trading houses and two copper producers, with at least another three firms in the application process,” reports Reuters.

“At some point, China is going to normalize its monetary policy, at which point none of these financing trades will ever exist again,” said the analyst at the Western bank.