Why copper prices are collapsing, and why it matters

China is the major culprit, but it isn't just about slowing demand. The industrial metal has also become a financial product – leaving it vulnerable to government currency maneuvers.

By MSN Money staff Mar 12, 2014 12:58PM

Recycled copper © Erik Isakson, Tetra images, Getty ImagesBy Carla Mozée, MarketWatch

MarketWatch on MSN Money

The investment world is buzzing about copper prices, and there's good reason to pay attention, as those falling prices trace back to China -- and a potential hard landing for its economy.

For the first time since July 2010, prices for a most active futures contract are trading below $3 a pound, according to data from FactSet.

China is the major culprit for the price drop, as the country is one of the metal's biggest customers and recent poor trade data have rattled the investing world. But the collapse in prices to their worst level in nearly four years isn't solely about demand concerns.

Overnight, the Chinese solar-energy company Baoding Tianwei Baobian Electric saw its bonds suspended on the Shanghai exchange after a second year of net losses spurred default fears. Such action would follow last week's first default by a Chinese company on its onshore corporate bonds.

The default worries have "shaken the foundations of the copper market which in China is used as much for financing transactions as for its commodity properties," wrote Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management, in a note Wednesday.

Wednesday's session saw high-grade copper for May delivery falling as low as $2.91 a pound.

With estimates that as much as 60 percent of China's copper stock is used as trade collateral, there's panic among copper investors who are worried about massive liquidation in the market, said Schlossberg.

Over the years, copper's value has expanded beyond its use as an industrial metal, and the commodity is now firmly a highly financialized product in China, said John Hardy, head of foreign-exchange strategy at Saxo Bank, in emailed comments Wednesday.

He said the drop in copper prices "can be directly traced to the recent and obvious move by the Chinese regime to weaken its currency in order to slow the popularity of the U.S dollar/China yuan carry trade that was driving their currency stronger against the USD even as major (emerging market) currencies were recently weak."

Investors engaging in a carry trade borrow or sell low-yielding currencies to fund investments in higher-yielding currencies.

As the dollar-yuan carry trade is being curbed, it appears large copper positions are being unwound, hitting those who were using copper as collateral and perhaps causing positions to be dumped, Hardy said.

Why it all matters: because the "the general risk from here is that this move in metals prices further destabilizes the Chinese financial system and will raise concerns of a hard landing in China if the authorities can't get ahead of the pressures and potential contagion effects this move is generating," Hardy said.

The traditional slowdown in downstream copper demand during China's Lunar New Year was more pronounced this year than last, analysts at Barclays noted this week, though they said they expected gradual demand improvement in the peak season for the second quarter.

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Tags: FCX
Mar 12, 2014 1:33PM
How do these failures affect us?  We have International Banks that have lent up to their eyeballs to these emerging markets.  When push comes to shove who do you think will get their money first?  A foreign Bank will be way down the list.  Avoid all forms of International banking or be very very sorry.
Mar 12, 2014 2:37PM

"the copper market which in China is used as much for financing transactions as for its commodity properties"

And, if it’s anything like their real estate market they sold the same pound of copper to three different people at the same time who then used their phantom copper as loan collateral five times to borrow a total of fifteen times the value of the original pound of copper (probably to get money to buy more copper).  

Mar 12, 2014 2:49PM
Copper is just another of a long list of manipulated commodities and markets: corn, oil, cotton, sugar... You name it. Anything Wall street knows you might want or need. If you need it, oh boy, that's their favorite! (they just love it if you need it) And they'll be there for their imposed middleman banker's cut. That is what they do. That is all they do.
Mar 12, 2014 2:45PM
Copper has always forecast recessions/depressions correctly without a single failure since before the Civil War.    The fact that copper is such a heavy industrial metal means that demand must be collapsing, world wide.

This more than any other signal should warn investors to be cautious and have trailing stops.  

We could be headed for a double dip or worse.
Mar 12, 2014 3:39PM

This is a good thing....low copper prices mean people will stop stealing copper wires, air conditioner units, etc.

Mar 12, 2014 3:02PM

How congress is chosen:  First, the party bigshots (D & R) sit around and figure out who in each district has been most loyal to the party (the biggest party ****-kisser!), and of course they nominate this guy to run for the seat. Now, most districts are solid D or R in the election, so just nominating them for the dominant party in those districts assures they will win the seat and be our congressmen. Oh, maybe 100 or so of the 535 seats could go D or R at the election, but even then, the guy one of the parties picked wins anyway. They can’t lose with this system any more than Kim Jung Un can lose his elections. They’ve got it sewed up. This is how the parties choose every single congressman to represent the parties’ and their contributors’ interests, oh I mean “represent” us.

Mar 12, 2014 3:25PM
Metals have been in a bubble for years. This was bound to happen.
Mar 12, 2014 3:09PM
This is why you can't base the entire economy on stocks and commodities trading. People who buy copper the make plumbing parts or wire are paying more for it because people are sitting on the supply and using it for near money, which drives up the price (value). People who buy or trade copper and use it as near money will now loose their shirt when the price drops. This is a valuable lesson that the good ole USA needs to learn. AND, China has such a hot economy they will own the whole world soon, right? Perhaps not, they are victims of their own greed, just like Americans. And just like America, the 1% make all the profit from the efforts of millions of people, the wealth gap there is as bad or worse than here. Only good news is, people will now stop sitting on the supply, which means manufacturing costs will go down, more people employed, etc. etc., you know, a goods and services economy that's sustainable.
Mar 12, 2014 3:29PM
Guess I'll stop saving those old copper pennies.
Mar 12, 2014 3:00PM

Many dominos have fallen because of one that started to teeter.

Mar 12, 2014 5:24PM
maybe when copper goes to crap Corning will sell more fiber optics.Now wouldn't that be nice for us or should I say for Corning.
Mar 12, 2014 3:40PM
The Chinese manipulate the market to protect their sorry commie asses, and don't care who they screw in the process.
Mar 12, 2014 3:35PM

The substance that will replace copper as a collateral financial metal around the world

will probably be high fructose corn syrup, commonly designated HFCS.   

Mar 12, 2014 4:34PM
China, the ultimate demand side economy.
Mar 12, 2014 5:11PM

and the house of cards that IS the crazy "leveraged financial world" is about to come crumbling down AGAIN!  geez...we didn't learn from China's last crisis decades ago...we didn't learn from our own leveraged mortage mess....  nuts!

Mar 12, 2014 6:14PM
China's race to capitalize (sorry) off the last dance of the industrial era has shown up only in big ways. And Texas use to think they were the only ones who invented "super size." Look at China. Their manufacturing sector is everything the United States use to be and more. Their housing bubble is huge, unbelievable. Their smog and pollution beyond epic proportions. What we are seeing of the down side of Capitalism -- the lying, the cheating, the two-timing, the greed, the avarice, the cooking of the books, the deceit and deception. Look at the epidemic of copper theft going on just here in the United States. It is all being exported to China. Same thing with U.S. Coal. When this pops it will be global. China's collapse will make the Great Depression look like a one aspirin headache.
Mar 12, 2014 6:06PM
The global market has commoditized just about everything for rigged and manipulated financial purposes rather than fundamental valuation. Gold, Silver, Copper, Natural Gas, Crude Oil, Corn, Coffee (bitchez!), all of it. And with the race down in currency devaluation the global markets have commidified currency wars even as default worries escalate. Hang on to your hats when this pops. Watch the yen.
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