Copper Collapses Most Since Dec 2011 On China Credit Fears

Tyler Durden's picture

We noted last night that Iron Ore futures prices were in free-fall as the vicious circle of China's commodity-collateral-backed shadow banking system unwind hits home amid fears of contagion from the Chaori Solar default. The first domestic Chinese corporate bond default has retail investors running scared as surprise spreads that the local government did not come to the rescue. The deleveraging is now spreading to copper prices (remember the massive cash-for-copper schemes of last year) as borrowers are forced to sell to meet cash calls which in turn drops copper prices, reducing collateral values and tightening credit conditions even more. This is the biggest copper price drop since Dec 2011...



More on Chaori and the fallout...

As Deutsche Bank notes,

On the topic of China, according to the WSJ the country’s first onshore corporate bond default has occurred earlier today in the form of Shanghai Chaori Solar Energy’s missed/incomplete RMB89.8m coupon payment. As we have written over the last couple of days, the bond is relatively small (RMB1bn or US$160m in face value) and the issuer is small (US$1.2bn in assets) but it’s an interesting case for a number of reasons.


Firstly, it’s a bond where the majority of bondholders are retail investors (WSJ, citing company management) which widens the scope of the impact from the market’s typical institutional investor base. Weibo, China’s version of Twitter, is showing photos of retail investors at a local Shanghai government office protesting the authorities’ lack of action in assisting the issuer (21st Century Business Herald).


Secondly, it should be highlighted that Shanghai Chaori avoided a default on its annual coupon payment last year due to the intervention of a local Shanghai government who persuaded banks to roll over loans. This time around, the policy appears to have changed with no last-minute assistance on the cards. Indeed, state-affiliated news agency Xinhua wrote in an opinion piece that a default would be the “the market playing its own decisive role”.


Interesting, given that the Chinese solar energy market was heavily subsidised by the Chinese government in recent years. The Xinhua article also commented that Chaori was not going to be China’s “Bear Stearns moment”.


In addition, domestic media are reporting that the company’s bankers and bond underwriters will not be helping the company make interest payments (21st Century Business Herald). Though this is a relatively small bond, there are potentially wider ramifications.


Bloomberg reports that China’s renewable energy industry faces US$7.7bn in bond maturities this year, and already three domestic bond issuances have been postponed or cancelled in recent days according to Reuters. This is certainly a macro story to watch in 2014

And we warned of China's Bronze Swan last year...

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China's FX lending and leads to upward pressure on the CNY.



But what does it mean for the actual Copper Financing Deal? The below should explain it:


An example of a typical, simplified, CCFD


In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.


A typical CCFD involves 4 parties and 4 steps:

  • Party A – Typically an offshore trading house
  • Party B – Typically an onshore trading house, consumers
  • Party C – Typically offshore subsidiary of B
  • Party D – Onshore or offshore banks registered onshore serving B as a client

Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.



Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit. 


The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them. 


Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1. 


Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration. 


Copper ownership and hedging: Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).


Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.

As Goldman further explains, the importance of CCFD is "not trivial" - that is an understatement: with the implicit near-infinite rehypothecation in which the number of "circuits" in the deal is only a factor of "the amount of time it takes to clear the paperwork", there may be hundreds of billions, if not more, in leverage resulting from this shadow transaction that has been used in China for years. Now, that loop is about to end. The reality is nobody can predict what the impact will be, but whatever it is - i) it will extract tremendous leverage from the system and ii) it will have adverse impacts on both China's ability to absorb inflation and grow its economy.


Hence this...

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Thought Processor's picture



Dr. Copper, Dr. Copper............   Paging Dr. Copper!

BaBaBouy's picture



Number 43,637.

Boris Alatovkrap's picture

Very very bad news is for Boris...:(

Boris must to be rethinking of tragedy for mining operation of shallow deposit copper ore.

camaro68ss's picture

You know what they say, as copper goes, so does the markets.....bawhahahaha, thats so 1900's DOW 17,000 bitchez

Drachma's picture

Will Boris' mother inlaw have chance to rest from back-breaking toil?

Boris Alatovkrap's picture

Da, now fat mother-in-law is join lazy nephew sit on sofa all day, eat Boris' food. Boris is must re-invent! You are having idea?

Drachma's picture

I hear in Russia concrete solve many problem...I mean for business plan of course. ;-)

Harbanger's picture

Boris is plan new business strategy and use existing resources like nephew and impressive upper body strength of mother-in-law. 
Harbanger suggest to open hand squeezed juice bar.  Nephew is wash beets and carrots.

0b1knob's picture

Bitcoin mining!  Have you relatives do it with pencil and paper.

MeelionDollerBogus's picture

I have plan. Maybe is Boris be invest for high-speed copper delivery systems in Crimea.

TruthHunter's picture

I notice that there are occasional similar downward spikes.

Looks like the traders step off the curb now and then.

I'll take notice when copper finds a cliff bottom.

SAT 800's picture

The copper price chart is still respecting it's apprx. forty five degree down-channel it's been in for several weeks. Although it is newsworthy that it dropped a dime in one day; it can hardly be "interpreted"; unlesss you're in the page click business, of course.

DannoH's picture

Don't forget Dr. Howard, Dr. Fine, and Dr. Howard.

walküre's picture

Yeah, about that... where the fuck have you been during like the worst few days of Russia / US affairs since what? The Bay of Pigs? Babushka better have some nice tits on her.

Carl Popper's picture

So.........the deflation monster every one used to laugh at is roaring louder and coming closer. 


Dr. Copper never lies.   You people will be begging  Mr. Yellen for some inflation someday.  


And I will be picking up "sugarbabes" on craigslist for 50 bucks in about a year if Mr. Yellen ignores your begging.


Your daughters are all mine.  Buuwahahahahaha! (As I twist my mustache back and forth)

pods's picture

Come for mine and the last thing that goes through your mind will be a very fast 7.62.x51mm bullet.

Just kidding.

Wait, not really kidding.


SAT 800's picture

"The deflation monster"; yeah, right. you've got quite an imagination.

nightshiftsucks's picture

So 7 trillion in new debt and 3 trillion in QE just to let deflation happen ? Shit Yellen is just getting started,she's going to make Bernanke look like an amatuer.

walküre's picture

What the fuck does it matter when that debt/money never sees the light of day because it just creates a circle jerk between banksters of various shades?

Wages aren't going up, unemployment is rising again. Supply side is not an issue, no shortages of any sort (yet).

Unless Yellen literally drops money from helicopters into people's laps, there cannot be any meaningful inflation. Prices on some items are going up but people are broke.

Flakmeister's picture

Dead money doesn't buy anything...

walküre's picture

..that and the fact that the Chinese central planners had created so much unsustainable one time demand for copper (among others). They all need oil to run their economies but they don't need to build or replace for a long time.

Dead money buys luxury items. But for every Maserati sold, 1000 Chevs remain unsold.

MeelionDollerBogus's picture

Except giant banker bonuses are hitting the wage markets & that means they'll have more assistants, more baubles, more workers for their objets d'art & other nonsense and that does in fact spill into the real economy.

walküre's picture

If you're sitting on piles of cash right now you gotta have balls harder than Thyssen Krupp steel. I know what I'm talking about. It makes me freakin' nervous but I don't trust anything else except for some precious.

thamnosma's picture

If it's all deflation, there's no money leaving the banks, why not hold cash?  Not getting your logic at all.

walküre's picture

When central planners are desperate, there will be several forms of capital controls:

- limited or scrutinized cash deposits (we have this now)

- limited withdrawals (already in place for a few years)

- finally when reset comes, limited amount of old cash outside the system is allowed to convert to new cash

The last part is the worst. I've seen this in Germany twice. First the Eastmark was only convertible 1:1 up to a certain amoun, then more at 2:1 and there were caps on that. Second, when Euro was introduced, it was hard getting thousands of former Deutschmark bills into the banks, converted into Euro.

Holding cash can be dangerous.

thamnosma's picture

But if deflation is reigning and the dollar secure, where's the need for a reset?   The reset would be required under debasement and inflation.  Obviously if the government were to switch to "new dollars" there's a risk, but again, that's a response to a failing currency.   Deflation protects the existing currency.

MeelionDollerBogus's picture

conclusion: deflation is not reigning. Deflation isn't happening so acting as if it is will be a giant mistake.

MeelionDollerBogus's picture

a friend of mine remembers seeing it in Vietnam too, with the paper and the gold. Little old lady hobbling along, poor old thing. In fact she was holding a shit-ton of gold leaf and that's what was slowing her down. Good camouflage being old & withered already.

MeelionDollerBogus's picture

conclusion: it's not all (or any) deflation. That word doesn't seem to mean what you think it means. It isn't a price drop. Nor is it a bubble-pop in a hoarded singular commodity. Deflation is a general decline in money supply and what's likely to follow (not assured) is a general drop in all prices for everything, period.

That's not happening. Not a sign of it. Dr. Copper's been visiting an olde style opium den while visiting China. Once Dr. Copper's back to roaming the entire globe he'll/she'll be back on his/her feet in no time.

Number 156's picture

The selloff traced out a nice little parabola. It was unusual looking, not like the typical trading in copper.
Like Han Solo telling Chewbacca as he's trying to avoid the attention of the imperial fleet: ".. I don't know, Fly casual."
Expect the weak hands to follow.

Bohm Squad's picture

It ain't easy bein' green...

machineh's picture

$3.00 is the round-number line in the sand.

Yellen: 'Don't step across that line, punk. Or I'll print your sorry red ass to oblivion!'

Dr. Engali's picture

Radio Shack closing so many store is killing copper. The little electric motor and ham radio guys have to find a new supplier.

joego1's picture

The ham guys are buying Chinese Baofeng radios like candy at $50 a pop.

homiegot's picture

It's called the Internet.

AbbeBrel's picture

Humm squinting at the $copper chart on stockcharts - it appears that the weekly chart shows copper going through a Bear Wedgie into early 2013, then dropping to *another* bearish wedgie - terminating now??    The bear's butt must be getting sore by now.   In any case a drop through this level could turn $copper into $coyote.   Meep Meep!!

fijisailor's picture

“the market playing its own decisive role”. says Xinhua

You won't hear this from the MSM during a major default in the USSA

GrinandBearit's picture

In other news...

Bitcoin founder denies to be the bitcoin founder.

Dorian S. Nakamoto listens during an interview with the Associated Press, Thursday, March 6, 2014 in Los Angeles. Nakamoto, the man that Newsweek claims is the founder of Bitcoin, denies he had anything to do with it and says he had never even heard of the digital currency until his son told him he had been contacted by a reporter three weeks ago.  


Flakmeister's picture

Does Fonestar have him on speed dial? That should be a tell...

walküre's picture

Awesome. If that's not a statement of confidence, I don't know what is. Now that the heat is on, nobody wants to have anything to do with it. Eventually they're coming to get Fonestar and suspect he's the founder.

Flakmeister's picture

I thought the orginal was pretty amusing....

Not that it really means anything quantitatively...


The real news of late is this:

NOAA issues El Nino Watch

A strong El Nino will result in record setting heat waves and will make fools of those claiming GW stopped 17 years ago (the last strong El Nino)

Here is a nice breakdown of temperature trends for La Nina, Neutral and El Nino years...


And if anybody wants to claim GW stopped 17 years ago, they had better be able to explain the following:

 Fitted trends using GISTEMP 

1970 to 1997:  0.146 +/- 0.067 C/decade

1970 to 2014:  0.163 +/- 0.031  C/decade

If the warming "stopped" why has the rate of warming increased if I add the last 17 years in?

superflex's picture

Ooops is right.

They since backed off that alarmist statement realizing they stepped on their smug eco-dicks.  The public was not pleased with that bullshit.

MeelionDollerBogus's picture

What bullshit? That link is in the article you posted and makes it clear.

The climate is changing & it's going to make food scarcer.

Tough titties if you don't like it. If you want any you'll pay up & lots or you'll starve. That's the solid evidence of global warming climate change.