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 Carla Mozée, MarketWatch
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.
More from MarketWatch
"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).
This is a good thing....low copper prices mean people will stop stealing copper wires, air conditioner units, etc.
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.
Many dominos have fallen because of one that started to teeter.
The substance that will replace copper as a collateral financial metal around the world
will probably be high fructose corn syrup, commonly designated HFCS.
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!
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Fed keeps important 'considerable time' language in reference to short-term interest rates, but dissents and dots leave doubts.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.