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Chinese Credit Concerns Clobber Copper; Collapse Continues To Lowest Since July 2010

Tyler Durden's picture




 

Copper futures prices are plunging once again, back under $3.00 back at the lowest levels since July 2010. The last 3 days have seen prices drop over 7.5% as China credit contagion concerns surge and letters-of-credit from last summer's cash-for-copper financing deals roll-off and businesses need the cash. The vicious circle of tumbling collateral values (copper and Iron ore) is exacerbating the tightening financial conditions in China as banks hoard liquidity, unwilling to lend to the over-capacity industries that the government has deemed unworthy. Rumors today of further defaults triggered this latest drop, and as we noted previously, there are a lot more to come.

Copper futures intraday are collapsing...

 

Which takes it back to July 2010 levels...

 

and LME Copper (where much of the L/C cash-for-copper deals were held) is also in freefall.

 

Rumors today of another Chinese corporate default, the second in a row are adding fuelt to the fire.  Via BusinessWeek,

Baoding Tianwei Baobian Electric Co. (600550)’s bonds and stock were suspended from trading today after the Chinese electrical equipment maker said it reported losses for a second year running.

 

The company, which also makes solar panels and is based in the northeast province of Hebei, reported a net loss of 5.23 billion yuan ($852 million) in 2013 versus a 1.55 billion yuan earnings deficit a year ago, according to a statement to the Shanghai stock exchange yesterday. The exchange, in line with its rules, will decide in seven trading days whether to continue the trading halt on Tianwei Baobian Electric’s bonds until its losses are reversed.

 

Investor scrutiny of China’s onshore bond market is mounting after Shanghai Chaori Solar Energy Science & Technology Co. last week became the first company to default. Chaori Solar’s failure to pay has stoked speculation more companies may miss debt deadlines also.

This should not be surprising - there are many more trusts and bonds to come...

As we warned previously,

Naturally, for an economy in which credit creation is of utmost importance, the loss of one such key financing channel will have very unintended consequences at best, and could potentially lead to a significant "credit event" in the world's fastest growing large economy at worst.

And don't look at what's coming down the shadow banking default pipelines, as we showed before. via BofA's David Cui

12 potential defaults reported by the media

Table 1 summarizes the information on the 12 major potential defaults in the trust industry that have been reported by the media. Most of them are coal mine related and heavily concentrated in one area, Shanxi Province. So far it seems to us that most of them may get extended upon the due date. The only exception over the next few months appears to be a product issued by China Credit Trust for a lead and zinc miner in Sichuan, Nonggeshan. Even without any major default over the next few months, the process of debt restructuring can be messy and weigh heavily on market sentiment.

19 Feb 2014, Rmb109mn borrowed by Liansheng & arranged by Jilin Trust

  • Details: This Rmb109mn tranche is part of a six-tranche trust product worth a total of Rmb973mn arranged by Jilin Trust for Liansheng, a Shanxi coal miner. The other five tranches have matured since 2H 2013 and remain overdue.
  • Potential outcome: Repayment may be extended.
  • Reason: Liansheng is undergoing a debt restructuring coordinated by the Shanxi provincial government. 1) The provincial government plans to help out involved financial institutions to ensure the region’s access to ongoing financing. According to people close to the situation, the implicit guarantee practice will most likely continue with the Liansheng’s case. 2) Trust companies may have to follow banks to help the miner out. Banks have agreed to extend their mid/long term loans by three years. Top 3 banks have total debts of Rmb10.6bn to Liansheng; top 3 trust lenders, Rmb3.7bn.

(Shanghai Securities News, 2/11; Economic Information, 2/13)

21 Feb 2014, Rmb500mn borrowed by Liansheng & arranged by Shanxi Trust

  • Potential outcome: repayment may be extended.
  • Reason: Same as the Jilin Trust case.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

07 Mar 2014, Rmb664mn borrowed by Liansheng & arranged by Changan Trust

  • Details: Other than the Rmb664mn product to mature on Mar 7, Changan Trust arranged another two products for Liansheng, totaling Rmb536mn which matured in Nov 2013. Both products remain overdue.
  • Potential outcome: repayment may be extended.
  • Reason: Same as the other Liansheng cases.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust

  • Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.
  • Potential outcome: The developer and the trust company may share the repayment.
  • Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.

(Source: Financial Planning Weekly, 3/6/2013; Guangzhou Daily, 4/6/2013, Boxun, 5/10/2013)

14 May 2014, Rmb1.5bn borrowed by Liansheng & arranged by China Jiangxi International Trust

  • Potential outcome: repayment may be extended.
  • Reason: Same as the other three Liansheng cases.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

30 May 2014, Rmb140mn borrowed by Nonggeshan & arranged by China Credit Trust

  • Details: invested in a lead and zinc mine in Sichuan.
  • Potential outcome: Likely to default.
  • Reasons: 1) Compared to coal mines of Zhenfu and Liansheng, the lead and zinc mine is a much less attractive asset: it is located in the mountains over 5,000 meters in altitude, inaccessible for 6 months of the year due to weather conditions, with low lead/zinc content; 2) According to an unnamed regulator, the central government is comfortable with trust defaults in the range of Rmb100-200mn.

(Source: 21st Century Business Herald, 31/7/2012; Caiing, 1/27)

25 Jul 2014, Rmb1.3bn borrowed by Xinbeifang & arranged by China Credit Trust

  • Details: Xinbeifang is another Shanxi coal miner.
  • Potential outcome: repayment may be extended.
  • Reason: Xinbeifang is negotiating with an SOE to sell some of its coal mine assets.

(Source: China Securities Journal, 1/15)

27 Jul 2014, Rmb319mn borrowed by Hongsheng & arranged by Huarong Trust

  • Details: Hongsheng is a Shanxi coal miner. Huarong sold another trust product for it which will mature in 4 September 2014, worth Rmb63mn.
  • Potential outcome: repayment may be extended.
  • Reason: Hongsheng may have assets to secure more financing. It issued these two trust products to replace another trust product that matured in Q3 2012. The owner also issued other trust products using his personal property assets as collateral and raised Rmb1.2bn.

(21st Century Business Herald, 20/12/2013)

7 Sept 2014: Rmb400mn borrowed by Zengdai & arranged by CCB Trust

  • Details: 1) The proceeds of the product were invested in financial markets. 2) Its 1st tranche, worth Rmb400mn, matured in Mar 2013 with a 38% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the product to Sept 2014. 3) Its 2nd tranche, worth Rmb359mn, matured in June 2013 with a 31% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the 2nd tranche to Dec 2014.
  • Potential outcome: The trust company and the investment company may share the losses.
  • Reasons: 1) The investment company refused to repay investors in full at the original due date so the trust company may have to chip in; 2) By Jan 2014, the 1st tranche reported a narrower loss of 24%, and the 2nd tranche, also a narrower loss of 13%; 3) Zengdai may pay on behalf of its investment company for reputation’s sake.

(Source: Securities Daily, 9/7/2013; CCB Trust)

20 Nov 2014, Rmb600mn borrowed by Liansheng & arranged by China Jiangxi Int'l Trust

  • Potential outcome: repayment may be extended.
  • Reason: Same as the other Liansheng cases.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

23 Dec2014: Rmb1.1bn borrowed by Xiaoyi Dewei & arranged by China Resources Trust

  • Details: Xiaoyi Dewei is a Shanxi coal miner. The trust product originally matured in Dec 2013 but repayment was extended to Dec 2014.
  • Potential outcome: Likely to default.
  • Reason: Both the miner and the trust company refused to repay investors in full at the original due date. There has been no reporting on asset sales by Xiaoyi Dewei.

(Source: Financial Planning Weekly, 11 Nov 2013)

15 Jan 2015, Rmb1.2bn borrowed by Hongsheng’s owner & arranged by Minmetals Trust

  • Details: the collateral is the Shanxi coal miner’s personal property assets.
  • Potential outcome: May be replaced by a new trust product.
  • Reason: Same as the July 2014 Rmb319mn trust product issued by Huarong Trust.

(21st Century Business Herald, 20/12/2013)

2Q/3Q 2014 – the next peak maturing period for collective trusts

We consider the trust market the most vulnerable part of the major financing channels for companies, i.e. loan, corporate bond and trust. The quality of the borrowers in the trust market tends to among the lowest. Within the trust market, collective trust products, i.e. those sold to more than one investor, tend to be risker than single trust products, i.e. those sold to a single investor. This is because investors in single trust products tend to be more substantial in resources, thus most likely more sophisticated in their risk control.

The Wind database lists close to 12,000 collective trust products, worth Rmb1.34tr, which cover roughly half of the collective trust market (Rmb2.72tr as of the end of 2013). It has reasonably good quality data series on the issuing dates and amounts raised. However, data on maturing dates are sporadic. We estimate that the average duration of the trust products is around 2 years. Based on this assumption and the issuing dates, we have mapped out a rough maturing profile of the collective trust market. As we can see from Chart 1, 2Q and 3Q this year will be the next peak maturing period for this market.

 

 

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Tue, 03/11/2014 - 11:51 | 4534440 LawsofPhysics
LawsofPhysics's picture

...and they want the reserve currency...  NOT.  The chinese have nevered wanted the reserve currency, they will profit from any all "market" moves.  All by design

Tue, 03/11/2014 - 11:53 | 4534452 fonestar
fonestar's picture

fonestar wonders what the future of physical copper looks like?  Will it become a currency for dirt people living in the land formerly known as "suburbia"?  Are supposed copper inventories anymore real than SLV or GLD?

Tue, 03/11/2014 - 12:01 | 4534492 NoDebt
NoDebt's picture

OK, I gotta ask- are some of those dotted red lines pointing "back in time" sloping ever so slightly downhill today or have I suffered a mild stroke?

Tue, 03/11/2014 - 12:07 | 4534518 Australian Economist
Australian Economist's picture

Second one is definately downward sloping, so you're not crazy unless I am too.

Tue, 03/11/2014 - 12:15 | 4534545 Jack Napier
Jack Napier's picture

JPM took over copper futures about a year ago IIRC. Still, it's harder to manipulate an industrial metal than a monetary one since it involves more than simply jawboning.

Dr. Copper says lookout below!

Tue, 03/11/2014 - 12:21 | 4534567 Manthong
Manthong's picture


..apologies to Eric

 "Cu"

If you wanna bust out you've got to fret about
Cu.
If you don’t wanna go down, GDP to the ground.
Cu.

[Chorus:]
He don't lie, he don't lie, he don't lie;
Cu.

If the Doc has bad news, you gonna get the blues.
Cu.
When the market is stunned and you wanna run.
Cu.

[Chorus]

If your margin is gone and you wanna ride on.
Cu.
Don't forget this fact, it’s rough to back.
Cu.

 

Doc don't lie, Doc don't lie, Doc don't lie;
Cu.

Tue, 03/11/2014 - 12:19 | 4534565 BandGap
BandGap's picture

If you take the first derivative of the function of slope vrsus time you will see that graph going up expotentially, through the roof.

It was rolling down hill before, it has now gone over the cliff.

Tue, 03/11/2014 - 12:07 | 4534512 Oh regional Indian
Oh regional Indian's picture

I think the global middle class, pumped in the last 30 years with cheap cradit bloat are going to be given a collective kick in the nuts.

On every front: Social, Economic, Political, Religious....severe stress.

Not to forget Fukushima, general imbapance beign exhibited by the earth...the operative word is stress.

In the press, it's all about the stress. 

I hope the coming Purim (March 15th-6th) pass pecefully. Last time there was so much geopolitical stress, Saddam/Iraq got attacked on Purim (the day after actually) in 2003.

Am expecting at least a skirmish in the Balkans, to be followed by a quick detente and then a further few months/years (who knows) of boiling the water...

No better time to know who we are...

http://aadivaahan.wordpress.com/2010/06/14/know-thy-self/

ori

Tue, 03/11/2014 - 12:47 | 4534655 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

Cheap credit over the last 30 years has moved future economic activity (back then) into the present (now the past). This has brought the economic flywheel to a dead stop. To get a flywheel back up-to-speed requires a lot of energy and time (and in this case, actual money, not debt).

Beware the Ides of March!

Tue, 03/11/2014 - 12:10 | 4534525 Panafrican Funk...
Panafrican Funktron Robot's picture

"Are supposed copper inventories anymore real than SLV or GLD?"

One needs only to look at the depository institutions for Comex copper to confirm the rhetorical nature of this question.

BTW, anyone else notice that there is 77K oz. of palladium registered vs. 101K oz in delivery notices this month?  Would be pretty interesting if palladium was the first thing to break.

Tue, 03/11/2014 - 12:16 | 4534554 walküre
walküre's picture

It will get settled and rolled over into future contracts. Nobody ever wants to take delivery. What would they need 101oz of Palladium for anyway?

Tue, 03/11/2014 - 12:22 | 4534576 BandGap
BandGap's picture

I would annually buy that amount of platinum (on carbon) to reduce chloronitrobenzene to chloroaniline. That isn't a lot of metal.

Tue, 03/11/2014 - 12:34 | 4534608 walküre
walküre's picture

Platinum or Palladium?

Tue, 03/11/2014 - 11:59 | 4534480 nasdaq99
nasdaq99's picture

THIS IS THE NECKLINE ON THE GIANT 2000s BUBBLE CHART OF COPPER.

 

Look at the monthly here.  If this break holds, copper could crash a long way down possibly breaking the back of all those collateral deals in china>  Click M to see the monthly chart and the bubble 2000s:

 

http://www.investing.com/commodities/copper-advanced-chart

 

 

Tue, 03/11/2014 - 11:51 | 4534442 0b1knob
0b1knob's picture

The cost of mining copper in the most efficient open pit mines is about $2.60 to $2.80 per pound.   So we are getting close to break even right now.

The cost of underground mines is much higher.

Tue, 03/11/2014 - 12:07 | 4534510 walküre
walküre's picture

then we need to decrease the cost of production

where do we start to cut?

Tue, 03/11/2014 - 14:49 | 4535202 0b1knob
0b1knob's picture

What do you mean "we" Lone Ranger?

Tue, 03/11/2014 - 11:52 | 4534445 Tinky
Tinky's picture

Hi,

I'm new to this site, and, having reviewed the recent stories, am confused as to why the DOW is down 26 points, rather than 2600. 

Thanks in advance for any insights.

Tue, 03/11/2014 - 11:59 | 4534486 Bosch
Bosch's picture

Bankers/Jews/Neo-Nazis/Warren Buffett. 

 

Just kidding, it is because Putin is awesome.  

Or something. 

 

Tue, 03/11/2014 - 12:03 | 4534498 Kaiser Sousa
Kaiser Sousa's picture

fraud.......

Tue, 03/11/2014 - 11:52 | 4534448 zorba THE GREEK
zorba THE GREEK's picture

It appears that the Ukraine's gold just arrived in the U.S. and they are dumping it

on the market to beat down the price of gold

Tue, 03/11/2014 - 11:55 | 4534460 zorba THE GREEK
zorba THE GREEK's picture

They didn't waste any time. TPTB must be getting desperate. 

Tue, 03/11/2014 - 12:07 | 4534515 Bosch
Bosch's picture

I know I just called APMex and asked specifically for Ukraine gold and they asked me how much I wanted.  

 

Tue, 03/11/2014 - 11:54 | 4534456 Cognitive Dissonance
Cognitive Dissonance's picture

It's not the fall that kills you, it's the sudden stop.

Tue, 03/11/2014 - 11:54 | 4534458 sudzee
sudzee's picture

80% of silver produced as a byproduct, refiners locally see 40% drop in scrap comin in.

Tue, 03/11/2014 - 11:55 | 4534461 Let them eat iPads
Let them eat iPads's picture

Falling copper prices hurt China.

Me rikey.

Tue, 03/11/2014 - 11:55 | 4534463 Dr. Engali
Dr. Engali's picture

Dr. Copper says the future doesn't look too good. Buy some puts and call him in the morning.

Tue, 03/11/2014 - 11:56 | 4534469 FieldingMellish
FieldingMellish's picture

PMs taken along for the ride down... but no mention from the Tylers, of course.

Tue, 03/11/2014 - 12:37 | 4534618 ThirdWorldDude
ThirdWorldDude's picture

3:30 PM in London was an hour ago.

Clockwork battering. 

Tue, 03/11/2014 - 11:57 | 4534472 Kaiser Sousa
Kaiser Sousa's picture

if there is a more fraudulent, manipulated market than Silver i sure would like to know what it is...oh yeah, the Fraud market...

http://www.silverseek.com/

http://www.kitco.com/charts/livesilver.html

once again, notice where the phony paper games begin - London open, NY open, London close.....

Tue, 03/11/2014 - 11:58 | 4534475 The Axe
The Axe's picture

Copper is    shitting itself

Tue, 03/11/2014 - 11:58 | 4534477 Panafrican Funk...
Panafrican Funktron Robot's picture

Waiting for confirmation of a sustained move below 3 on copper.  Dollar below 80 + copper below 3 + crude over 100 is probably causing some pants shitting in big money circles.  It looks like all resources are being put into defending the 10 year UST, and peripheral indicators are starting to break as a result.  Only so many tentacles available to plug the holes.

Tue, 03/11/2014 - 12:01 | 4534496 Number 156
Number 156's picture

 If it drops below 1.5 then that's confirmation that all hell has broken loose,
and all the Fed governors die and are resurrected as Cenobites.

Tue, 03/11/2014 - 11:58 | 4534478 starman
starman's picture

who needs copper anyway when they got plastic!?

Tue, 03/11/2014 - 14:08 | 4534997 DontGive
DontGive's picture

Maybe the earth wanted plastic for itself?

https://www.youtube.com/watch?v=NBRquiS1pis

Tue, 03/11/2014 - 12:01 | 4534483 Number 156
Number 156's picture

Calling Dr Copper...

Tue, 03/11/2014 - 13:31 | 4534829 disabledvet
disabledvet's picture

"Where's my copper penny?"

Tue, 03/11/2014 - 12:00 | 4534493 Devotional
Devotional's picture

and Gold being hammered. Kaplow! o_O

Tue, 03/11/2014 - 12:04 | 4534505 Hongcha
Hongcha's picture

Hammered into breastplates for ceremonial armor rewarded to gladiators.

Tue, 03/11/2014 - 12:06 | 4534509 buzzsaw99
buzzsaw99's picture

ghost cities = ghost eCONoME

Tue, 03/11/2014 - 12:13 | 4534535 walküre
walküre's picture

... all according to Mao's red book to beat the West at its own game and defeat the West in the process.

Tue, 03/11/2014 - 12:07 | 4534513 Let them eat iPads
Let them eat iPads's picture

If there is any company in China that doesn't make solar panels, I'd like to invest in it.

Tue, 03/11/2014 - 12:07 | 4534516 Kreditanstalt
Kreditanstalt's picture

SOMETHING spooked all the markets - or should I say, the machines - at exactly 11:30am...

Tue, 03/11/2014 - 12:12 | 4534534 scubapro
scubapro's picture

just the european close is all.      we let them push it up, sell into a green mkt; then sell it down during US, then buy /es  when asia opens...its like monkey in the middle for retail 'investors'

Tue, 03/11/2014 - 12:16 | 4534549 Kreditanstalt
Kreditanstalt's picture

Same as the "gold price" slow meltdown that happens DAILY in the three or four hours immediately after North American markets close but before Asia opens...games are being played with paper.

Tue, 03/11/2014 - 12:07 | 4534517 Seasmoke
Seasmoke's picture

There goes the business of stripping of copper @fraudclosed homes...this is some Depression !!

Tue, 03/11/2014 - 12:11 | 4534527 walküre
walküre's picture

this is funny:

The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

did they learn how to do this on Wall Street? Did that collateral ever exist? Is anything coming out of China, reported or manufactured actually NOT fake?

Tue, 03/11/2014 - 12:10 | 4534529 scubapro
scubapro's picture

anyone else seeing gold and spx move together, down, for the first time in many weeks.    last few weeks theyve been opposite.   

 

also,  'manpower survey' out today claims all sectors plan on hiring in the next couple of months....anyone follow that or have an idea as to that surveys accuracy?

Tue, 03/11/2014 - 12:15 | 4534548 Spungo
Spungo's picture

So they use copper as collateral, but the price of copper is going down, so people no longer have enough collateral to renew loans? I'm sure this will end well. That's basically what happened to Lehman Brothers, but they had real estate instead of metal. This is also how stock market crashes begin. The underlying stock goes down in value, so there is no longer enough collateral to back the loan, so the stock needs to be sold to raise cash.

Tue, 03/11/2014 - 12:17 | 4534560 FieldingMellish
FieldingMellish's picture

Proof that rehypothecation has impact on the way down as well as the way up.

Tue, 03/11/2014 - 12:21 | 4534571 walküre
walküre's picture

Individual stocks have gone down for a few weeks now but the "ACME S&P Painters ®" only have varying shades of green in their cans.

Tue, 03/11/2014 - 12:17 | 4534561 amarshall
amarshall's picture

Maybe the junkies in the Northeast will move on to other precious metals and leave the gutters and AC units alone

Tue, 03/11/2014 - 12:47 | 4534654 ghostzapper
ghostzapper's picture

Sorry guys but these charts can't be accurate.  You know all the guys on CNBC and Fast Money have always said "Dr. Copper" shows us the way and they all seem so cheery and optimistic and confident and I really trust what they say.  Besides I'm sure Cramer has a counter to the theme insinuated in this article.  ZH will probably have to make corrections to it to get everyone back on track.   

Tue, 03/11/2014 - 13:05 | 4534706 pashley1411
pashley1411's picture

 Must be the day for Shakespeare quotes:  "Cry 'Havoc!', and let slip the dogs of (credit) war".

Saw "Hamlet" this spring.    Everyone dies, so I'm prepared for what else 2014 offers.

Tue, 03/11/2014 - 13:30 | 4534822 SmittyinLA
SmittyinLA's picture

when it gets below $2 my beach house gets a real copper roof 

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