Chinese commodity financing scam dents copper’s prospects

Copper prices on the London Metal Exchange have dropped over five per cent since the beginning of the year to $6,987 (₹4.22 lakh) a tonne. A major reason for this fall is the drop in demand after a scandal over financing of commodities broke out in China. Data on Chinese copper imports show sharp drop in consumption.

The scam came to light a couple of months ago and it has seen copper shipments to China drop drastically. In May, copper imports declined 16 per cent to 3,80,000 tonnes from April and last month they slipped further to 3,50,000 tonnes.

Copper prices could come under more pressure after Citigroup Inc Chief Financial Officer John Gerspach said, during the weekend, that the bank has extended $280 million (₹1,692.31 crore) as loan to non-Chinese subsidiaries of large multi-nationals at two Chinese ports, Qingdao and Penglai.

The problems have cropped up in the metals market after Chinese authorities said they were probing a commodity trading house, Decheng Mining, charged with securing loans worth $435 million (₹26,291 crore) after pledging three times over the same metal stocks in Qingdao port. The trading house has also done the same thing with aluminium.

Chinese officials suspect that some 3,000 tonnes of copper and one lakh tonnes of aluminium could have been offered as collateral several times to obtain loans.

Bloomberg reported that local authorities in China were checking metal inventories that included 1.94 lakh tonnes of alumina and 62,000 tonnes of aluminium besides copper.

At least 18 banks have lent a total of 14.8 billion yuan (₹14,400 crore) to Decheng Mining owner Chen Jihong, a Singapore national. Other banks aren’t revealing their exposure to commodity financing in China and there are fears that there could be more than one claimant for the pledged stocks.

South Africa-based Standard Bank Group Ltd has, on its part, begun investigations into potential irregularities with metals in bonded warehouses at Qingdao port.

The scandal has broken when the metals market looked to gain after copper slumped to a four-year low in March in view of China’s slowing economy. Banks and trade fear that the scandal could be deeper than initially feared.

China’s move to tighten extending credit to corporate firms is seen the reason for such a scandal. This led to commodity financing, wherein companies pledged their stocks of raw material and finished products as collateral to get loans, and rise of private lenders. In case of any default, the lenders could sell these stocks and recover their loans.

Minsheng Bank, one of the lenders, has said that its collateral ratio for the loans is 55 per cent. This means that if a borrower has offered collateral for, say, ₹1,000, the bank has given ₹550 as loan.

The scandal has resulted in liquidity problems since banks have tightened their credit norms. This can lead to problems in the market and even lead to selling pressure – a reason for copper’s struggle. Some companies which had held these inventories only for obtaining credit have begun to offload them in the market.

International lenders have cut their exposure in China and they are increasing their scrutiny on their clients from the communist nation.

The scandal has also reduced the arbitrage opportunities between the Shanghai Futures Exchange and the London Metal Exchange with the premium that Shanghai enjoyed dropping rapidly. Players in the metal market took advantage of the Shanghai premium by selling copper on the Chinese bourse and buying it on the London exchange.

But a section of trade now sees reverse arbitrage, where investors can sell on the London exchange and buy from Shanghai.

For India, this scandal will ensure lower copper prices. Firms producing copper here fix the price based on the previous fortnight on the London Metal Exchange. With prices under pressure, it is likely that the metal used for electrical and construction purposes may not see much of a rise for now.

China's MMG to Cut 2014 Zinc Output due to Increasing Prices

MMG Limited of China decided to curb its 2014 zinc output due to the increasing prices of metal because of the limited supply.

The company’s century mine of Australia is planning to run dry next year, which removes about half-million tonnes of zinc from the 13 million tonne global market. This results an increasing price for the metal.  The mine is the world’s largest zinc source.

This made the mining giants Nyrstar and Glencore to find out new zinc source so as to meet up with the Chinese zinc demand for rust proofing the new cars and to coat steel. In this week, LME-three month zinc traded at its highest price, which is the highest in almost three years. Since March end, the prices have increased 20 pct.

The company cut production output targets of zinc concentrate from 600,000 to 625,000 to between 575,000 tonnes and 600,000 tonnes due to the slow performance at Century mine in the second quarter this year. The Q2 output of the zinc decreased by 13 pct year on year to about 110.891 tonnes. Refiners of Nyrstar are the major buyers of Zinc mines at MMG.

MD of MMG, Mr. Andrew Michelmore said that what they were seeing at present was a recognition that not only Century but also number of other mines were closing down and supply of the zinc concentrate was going to be tighter and tighter. Duglad River deposit in Australia, which is now subjected to an assessment of future enhancement, will partially replace the lost production output from Century.

Big Brunswick and Perseverance mines closure in Canada caused zinc lost of about 335,000 tonnes last year. Due to depletion, old mines in Africa and Europe also get closed. Zinc is mainly used as an anti-corrosive in the galvanizing process.

The global zinc metal market declined to 194,000 tonne deficit the first five months to May 31, according to the International Lead and Zinc Study Group. This is above 10 times the deficit reported in the first 11 months of the year 2013.

Aluminum in Bull Market as Investors Lured by Shortage Outlook

Aluminum entered a bull market in London and traded near the highest in 16 months on speculation demand will exceed supply for the metal used in everything from cars to packaging.

Stockpiles monitored by the London Metal Exchange slumped 9.4 percent this year to the lowest in 22 months. Producers outside China cut output after prices on the bourse slumped 13 percent last year. Demand will exceed supply by 136,000 metric tons this year, with the deficit widening to 504,000 tons next year, Bank of America Corp. estimates. Premiums added to the LME benchmark price to obtain metal in Europe, North America and Asia climbed to records this year.

“Aluminum is another metal with improving fundamentals, so we’re not surprised to see the price rally there,” said Nic Brown, head of commodity research at Natixis SA in London. “As the global market gradually shifts into deficit, so the LME aluminum price should benefit.”

Aluminum for delivery in three months on the LME was little changed at $2,021.75 a ton at 9:20 a.m. in Tokyo. The metal advanced 2 percent to $2,020 a ton yesterday, 20 percent above the closing low of $1,677 on Feb. 3, fulfilling the common definition of a bull market. The price touched $2,024.25 yesterday, the highest since Feb. 28, 2013, and is 12 percent higher this year.

Output cuts outside China, the biggest producer, reached almost 2.8 million tons a year since November 2011, while curbs in the Asian nation amounted to 3.2 million tons since January 2013, according to HSBC. Producers are unlikely to restart in the coming quarter even if prices recover,Michael Widmer, an analyst at BofA Merrill Lynch in London, said a report July 10. Traders hold inventories “tightly,” he said.

LME Stockpiles

Stockpiles tracked by the LME fell for a 14th straight session to 4.95 million tons, the lowest since Sept. 12, 2012. Not all is immediately available as some metal is tied to financing deals. It takes 774 days to withdraw aluminum from LME-approved Pacorini Metals warehouses in the Dutch city of Vlissingen, according to the LME. Wait times at the biggest repository of LME aluminum lengthened by 58 days from the end of May.

Premiums added to LME prices for immediate delivery, which indicate regional supply and demand balance, are at a record $455 a ton in Europe, while the U.S. surcharge climbed 68 percent this year to 19.75 cents a pound, according to Metal Bulletin data. Aluminum for immediate delivery traded at a $13.75 a ton discount to the three-month contract last week, the narrowest contango since Dec. 18, 2012. A narrowing contango signals shrinking supplies of nearby metal.

Market Positioning

The rally in industrial metals including aluminum has been driven by “paper market positioning” on the back of improving macro sentiment, money inflows and anticipation of more positive supply and demand conditions next year, David Wilson, an analyst at Citigroup Inc. in London, said in a report July 16.

Analysts from Citigroup to Macquarie Group Ltd. still question whether the rally can be sustained as China ramps up production. LME stockpiles are equivalent to almost the whole of North American consumption last year, according to HSBC data.

“You cannot ignore the gigantic stocks overhanging this metal,” said Vivienne Lloyd, an analyst at Macquarie in London. “It’s true to say a lot of these metals are not as easily accessible as perhaps they should be, but the story doesn’t really hold water. The metal is fundamentally oversupplied.”

bloomberg

Kotak to buy 15% stake in MCX for Rs 459 cr

MCX surged as much as 9.3 per cent in trade on Monday to hit its fresh 52-week high of Rs 860, after the private sector lender Kotak Mahindra Bank BSE 1.90 % agreed to buy a 15 per cent stake in the company for Rs 459 crore. 

At 09:40 am; MCX was trading 6 per cent higher at Rs 831.85. It hit a low of Rs 735 and a 52-week high of Rs 860 in trade today. 

Financial Technologies BSE 5.46 % was trading 4.7 per cent higher at Rs 280.30 and Kotak Mahindra Bank was up 2.8 per cent to Rs 961.80. 

The statement said the bank had entered into a share purchase agreement for the deal that is subject to certain conditions and regulatory approvals. 

"We have agreed to take a significant minority stake in MCX. We are excited by the potential presented by the financial infrastructure space in the country and believe that an investment in MCX, with its significant franchise, will create long-term value," executive vice-chairman and managing director Uday Kotak said in a statement. 

Market sources said Kotak had to pay a slightly higher price than it originally wanted after Rakesh Jhunjhunwala recently bought MCX shares, setting a benchmark. Kotak, whose own commex failed to take off, is betting on the passage of Forward Contract (Regulation) Act, or FCRA, which will allow options and index futures products that could raise volumes higher than than stock exchanges. 

Shares of software solutions provider FTIL had risen in recent days on expectations the Kotak Group would buy the promoter's stake but had fallen 3.6 per cent to Rs 267.35 on Friday at the BSE. 

The Kotak Group has linkages with the commodities sector through its various ventures Kotak Bank through lending activity to the agriculture sector or through its having promoted commodity futures bourse ACE, in which it has 40 per cent.

Copper prices to slide on weak demand from Chinese property market, says Goldman Sachs

The latest analyst report by the US-based investment bank Gold man Sachs notes forecasts copper prices to slide further on weak demand from Chinese property market. The poor demand from the country’s construction sector will lead to fall in copper prices over the next 6 months to 1 year, the report noted.

According to Goldman Sachs, nearly 61% of Chinese copper demand comes from housing and property sector. Out of which 49% accounts for housing needs including local power infrastructure, telecommunications and lighting. The balance 12% copper demand comes from installation of home appliances after property sales. It also noted that the power grid infrastructure projects accounts for only 13% of the country’s total copper demand.

 

The property inventories in China are already at its peak. New starts are expected to slow down during H2 2014, as property prices continue to remain weak. The copper demand becomes high when the project reached its completion stage when internal and external copper wiring are installed. The construction completion cycle is expected to remain subdued in the medium term.

 

GS forecasts the global copper market to end the year at a 385,000 mt surplus, with prices averaging $6,778/mt in London and 307 cents/lb ($6,768/mt) in New York.

Money Printing Is Not Bringing Prosperity To Main Street In 3 Charts

Furious money printing by the world’s major central banks is not generating real growth and prosperity—–but professional economists never seem to get the word. As shown below, the 2014 outlook for global real growth has been marked down sharply since early 2013. Back then, of course, Abenomics and massive QE by the BOJ was supposed to cause the Japanese economy to soar; Draghi’s “anything it takes” bromide was going to jolt Europe out of its slump; and the elixir of QE3 was certain to finally cause the US economy to attain “escape velocity”.

Its not working out that way. In Japan, import inflation is soaring, real wages are still falling and the economy is entering a new slump in Q2 owing to a tax increase that was unavoidably necessary to pay for its runaway fiscal largesse. In Europe, the Bank Of Italy, Draghi’s home base, has now marked its forecast of 2014 real GDP growth to essentially zero. And in the US after the disastrous first quarter, along with what is shaping up to be a tepid second quarter, real growth will not achieve any kind of velocity, “escape” or otherwise; in fact, consensus real GDP has already been marked down to 1.7%—the lowest rate of expansion since the financial crisis. Accordingly, it is only a matter of time before the global forecast for 2014 shown below below is marked down even further.

It is no mystery as to where all the central bank “stimulus” is going. Since early 2013 fully fourth-fifths of the 40% rise in the S&P 500 is due to multiple expansion, not earnings growth from a tepid economy. This is clearly the effect of massive central bank injections of cash into Wall Street and other financial markets, yet it is especially perverse under current circumstances. Given the massive instabilities and headwinds afflicting the global economy—from the house of cards in China, to the failing retirement colony in Japan, the welfare state fiscal crunch in Europe and the faltering growth of breadwinner jobs and real investment in productive assets in the US—-the capitalization rate of future earnings should be down-rated. That is, future corporate earnings are now worth far less than the historical PE norm, not more. Accordingly, the massive expansion of PEs shown below is yet another expression of the vast financial deformations being caused by monetary central planning.

In any event, the “financialization” brought on by the central banks has had a truly perverse effect.Stock markets and corporate profits are at all time highs. Yet the true measure of main street economic health—-the share of adults who are employed—is at a modern low. It is said by traditionalist believers in sound money that we can not print our way to prosperity.

These charts of the week provide some pretty stunning evidence of that truth.

zerohedge.com

The 2 Charts That Have BofA Worried About A "Greater Correction" In Stocks

While the S&P500 rebounded sharply on Friday, BofAML's Macneil Curry warns evidence continues to say that this is a very late stage advance from which a greater correction is forthcoming. The recent deterioration in breadth (52wk highs failing to keep track with price), the negative seasonal period and divergences between the broader indexes say that risk/reward is skewing to the downside. Bottom Line: "The S&P 500 is vulnerable."

Via BofAML's Macneil Curry,

The S&P500 is vulnerable

While the trend in the S&P500 is still higher, with potential for a near term push towards 2000; this is a very late stage advance from which we look for a medium term correction. 1944 (the June-26 low) is key. Below here confirms a top and turn...

The 2 charts he is most concerned about...

Breadth...

The bearish divergence for new 52-week highs from last May points to fewer and fewer new 52-week highs as the S&P 500 has continued to rally to new all-time highs. This suggests weaker internals.

The divergence in new 52-week highs from last May is a sign of a maturing rally from late 2012.

and Seasonals... 

With President Obama in his second
term, 2014 is an incumbent mid-term.2014 is following the incumbent midterm year YTD through June. The pattern calls for a June/July peak ahead of a pullback into September. This has the potential to support large and mega caps relative to small caps.

Going back to 1928, July is the strongest month of the year with an average return of 1.52% and is up 57% of the time.

However, June was up 1.9% and July returns tend to fizzle, not sizzle, after an up June. When the month of June is up, July is up only 51% of the time and has an average return of 0.48%. This is well below average for July and a below the average monthly return for all months of 0.59%.