Copper price falls on Chinese concerns

Copper pipes Copper prices have hit a near four-year low

Related Stories

It's called Doctor Copper because you are meant to be able to tell the health of the global economy from the way it behaves.

And at the moment copper is looking pretty sick.

The price of the metal has fallen for two weeks in a row, and reached $6,376.25 a tonne, a low last touched in June 2010.

Analysts are blaming the decline, in part, on signs of weakness in the Chinese economy.

On Thursday of last week the latest batch of numbers out of Beijing showed industrial production grew at its slowest pace for more than four years during January and February.

Meanwhile, retail sales and investment were way lower than expected.

So demand has shrunk, and copper prices have been hit.

Stockpiles

Start Quote

The copper price is dictated by China, it has 40% of the copper market”

End Quote Andrew Latto Senior analyst, Fat Prophets

But it's not just the Chinese slowdown that has caused the plunge in the price of copper - Chinese businesses have been using the commodity as collateral for their loans.

So with the first ever bond default in China, commodity investors are worried there may be a glut of the metal coming on to the market.

Exactly how much copper is being held for collateral is uncertain.

Yet there are warehouses in Shanghai that are simply stuffed with copper. Bonded copper stocks in China are estimated to be at about 725,000 tonnes.

And in recent months imports have been accelerating.

The country imported a record 536,000 tonnes in January, up 53% year-on-year - the February figure was a little lower, but that's still a great deal of copper at a time when the economy is gearing down.

No-one is certain about how much of this is being used for finance, but estimates vary between 40% and 50%.

Chinese electrician at work China's power grid is expected to grow by 10% and may rescue the copper price

So when solar-equipment maker Chaori Solar defaulted on its loans, questions started to be asked about what would happen to all that collateral if too many other companies defaulted on any copper-backed loans.

The answer is there would be awful lot of people wanting to sell copper.

Overreaction?

Start Quote

We think prices will improve in the second quarter, which is the traditional time for a pick-up in copper consumption”

End Quote Gayle Berry Barclays

Then just to make people more nervous, another Chinese solar energy company, Baoding Tianwei Baobian Electric, saw its bonds suspended on the Shanghai exchange.

It has had two years of losses now, and looks a short step away from default.

On Thursday Chinese Premier Li Keqiang talked about "unavoidable" defaults that lie ahead.

The era of easy state-backed credit is coming to an end, lenders are worried, and copper is paying the price.

Andrew Latto, senior analyst at research group Fat Prophets, says: "The copper price is dictated by China, it has 40% of the copper market.

"And if they are determined to take these steps to allow the market to dictate the level of credit, then there is more scope for a downside, and that's what the market is worried about."

Copper pipes Copper - not just for pipes and wires, but also a financial tool

Gayle Berry, director of base metals research at Barclays agrees, but says the markets were overreacting.

"It is something the markets are very scared of," she says, "but they don't really understand the complexities of the way trade is carried out."

She explained that financing takes place in two ways.

Copper is imported using a letter of credit, and then sold straight on to provide access to cash often for investment into real estate.

The second method involves the selling of copper for a fixed period for cash.

She says that the Chaori bond default has little to do with this sort of financing.

She insists that the stockpiles of copper do have an eventual industrial destination - and that is what will determine the price.

"We think prices will improve in the second quarter, which is the traditional time for a pick-up in copper consumption," she says.

"The government has signalled major increases in infrastructure work on the power grid - to increase its size by 10% - and that will provide a huge market for the stocks in Shanghai."

More on This Story

Related Stories

More Business stories

RSS

BBC Business Live

  1.  
    08:36: BAE BUYER

    BAE Systems continues its movement into cyber security, stumping up £144m for Perimeter Internetworking Corp, which trades as SilverSky, a cloud security firm. The purchase will add to earnings in three years, says the firm

     
  2.  
    08:24: TOTAL SHARES

    Shares in French oil firm Total are understandably lower this morning following the death overnight of the company's widely respected chief executive Christophe de Margerie in a plan crash in Moscow. Total has opened down nearly 3% to €42.94.

     
  3.  
    08:12: WHITBREAD
    General view of cup from a Costa Coffee shop,

    Revenue for the owner of Costa Coffee and Premier Inn was up 13% to £1.29bn for the six months ended 28 August. Whitbread chief executive Andy Harrison said: "The trading momentum of our strong first half performance has continued into the first few weeks of the second half and positions Whitbread well to deliver full year results in line with expectations."

     
  4.  
    08:00: GKN RESULTS

    GKN, which makes parts of planes and cars, said sales fell of the third quarter - that's July to September - but profit rose. A stronger pound than last year caused much of the lost revenue. For the rest of the year, the motor and aerospace market will grow, while agriculture "looks set to continue its recent decline," it says.

     
  5.  
    07:50: ARM CHIPS BBC Radio 4

    Simon Segars the boss of chipmaker ARM is on the Today programme. He says lots of companies license his firm's tech so he's not worried about competition from the likes of Intel, which is now targeting ARM's market. "Competition is a good thing," he says. He adds: "History has shown the technology solution that we produce is the one that goes into most devices. Virtually every smartphone in the world uses an ARM processor". So, safe to say he's not worried in the slightest then.

     
  6.  
    07:35: ASOS PROFITS DOWN
    ASOS webpage screengrab

    Online retailer ASOS has reported as 14% slump in profits to £46.9m. Last year ASOS reported profits of £54.7m. There are no surprises here, though. The firm has previously warned "disruption" from investment in warehousing and the launch of its new business in China would hurt profits and that remains the case. Boss Nick Robertson says the firm is "in a period of major investment that comes at a short term cost, but the medium-term benefits will be significant."

     
  7.  
    07:20: ARM CHIPS
    chip

    ARM, which could well make the chips in your mobile phone, says it made $320m (£195.5m) of sales in the third quarter, up 12% compared with last year. It will probably sell $350m in the final three months of the year, it said.

     
  8.  
    07:10: RECKITT RESULTS
    Reckitt Benckiser products

    Reckitt Benckiser says it now expects full year revenue growth at the lower end of its total revenue growth target of 4-5%. The firm "delivered a robust performance in tougher markets in the third quarter" it said.

     
  9.  
    07:00: CHINA GROWTH BBC Radio 4

    China's economy grew by 7.3% in the three months to September, compared with expectations of 7.2%. But it's still the lowest growth in six years. The BBC's Chief Business Correspondent Linda Yueh tells the Today programme Chinese monetary policymakers want to slow the Chinese economic growth gradually and allow the rest of the world to get used to it. China is becoming a "middle income economy" she says and will revert to a normal path for a developed economy over time of around 3% to 4%.

     
  10.  
    Via Twitter Linda Yueh Chief business correspondent

    tweets: My interview with CEO of Oscar de la Renta fashion house, Alex Bolen, from Talking Business

     
  11.  
    06:41: ENGINEERING SKILLS Radio 5 live

    We don't have enough engineers in the UK or scientists for that matter argues Ann Watson of Semta, an engineering skills charity, on 5 live. She says: "We need a million scientists, engineers and technicians by 2020, We are starting to see a shortage in education; people training those recruits." The perception of engineering as a "dirty, oily industry" doesn't help, she says.

     
  12.  
    06:30: STOCK MARKET Radio 5 live

    Jane Foley, senior currency strategist at Rabobank is on 5 live talking about the falling stock market. "If we see stocks fall more we may see companies bargain hunting," she says. So more firms may start purchasing each other.

     
  13.  
    06:21: HEATHROW TRAVEL Radio 5 live
    heathrow

    Travel writer Simon Calder is on 5 live talking about the weather. He says he sees about 50 weather-related cancellations at Heathrow, so perhaps about 5% of flights so far. Flights to Frankfurt look hard to come by, he says.

     
  14.  
    06:12: FLIGHTS CANCELLED

    Heathrow airport has said this morning that around 10% of flights will be cancelled today as the remnants of Hurricane Gonzalo hit the UK. Flights with the 20 biggest carriers would be affected, it says. British Airways has already cancelled some ahead of the expected severe weather. The remains of the hurricane are predicted to bring heavy rain and gusts of up to 75mph in some areas, causing disruption to rush-hour travel. If you're travelling today it's worth checking before you arrive at the airport.

     
  15.  
    06:02: TOTAL CEO DEATH Radio 5 live

    Christophe de Margerie, the chief executive of French oil company Total, has died in an air crash in Moscow. Sarah Rainsford, the BBC's correspondent in Moscow says poor weather with low visibility is a possible cause of the crash. His plane crashed when it collided with a snow-clearing machine killing him and three crew, she tells 5 live.

     
  16.  
    06:01: Howard Mustoe Business reporter

    Good morning! Get in touch via email bizlivepage@bbc.co.uk or on twitter @BBCBusiness.

     
  17.  
    06:00: Matthew West Business reporter

    Morning folks, we have the latest public borrowing figures out at 9:30 today. But before that we have full year results from online retailer ASOS, and interim figures from Whitbread, plus the weather is promising to play havoc with the transport network today with 10% of flights out of Heathrow already cancelled this morning. We'll bring you everything as it happens.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.