Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?

Tyler Durden's picture

"The best way to define the mood in the market right now is panic," warns one commodity broker, adding that "everyone understands why we are going down, but nobody can tell where the bottom is." As the WSJ notes, the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal - exacerbated by the vicious cycle of credit-collateral-contraction. So what is the cheapest way to play continued stress (with potentially limited downside)? The diversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights...

Is Glencore the most exposed to a decline in commodities prices? – A trading giant rated BBB with over $55bn of debt and heavy exposure to commodities. 

A downgrade to below investment grade would be catastrophic to Glencore’s trading business. 

Company’s 12/31/2013 presentation says a 10% decline in Copper Prices would reduce EBIT By $1.2bn...

As of 12/31/13, Glencore had $55.185 billion in Gross Debt

By 3/12/2014, Copper has declined to a 44 month low, 12% decline in YTD 2014

Glencore reports Net Debt of $35.882bn, which is $55.2bn of gross debt minus $2bn of cash minus $16.4bn of "Readily Marketable Inventories." Nowhere do they define what’s included in the Readily Marketable Inventories and whether or not the RMIs are hedged.  The firm is still highly levered for investment grade even if RMIs can be converted into cash at stated value.

As if that was not enough, the CFTC and DOJ are currently investigating commodities price manipulation and Glencore has been named in several aluminum antitrust suits; leaving the question of liability hanging over their head.

Via WSJ,

“The economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal




copper prices skidded to their lowest level since June 2010, bringing the metal's year-to-date losses to 12%. Iron-ore prices are down 8.1% this week, after falling to their lowest level since October 2012 on Monday. Aluminum, lead and zinc prices also have declined in recent days




"The best way to define the mood in the market right now is panic,"




Now that growth in the world's second-largest economy is downshifting from double digits to an estimated 7.5% this year, many investors and analysts predict global demand growth for industrial commodities will slacken...Iron ore is the main component of steel. China's steel consumption has surged in the past decade as the property and manufacturing sectors boomed. Now that China's leadership has pledged for a more consumer-focused economy, the demand trajectory for steel is in doubt, analysts said…Coking coal, used to fuel the blast furnaces that forge steel, has also been under pressure, with prices down 7.1% this year…


Last week's first-ever corporate-bond default on the mainland showed that the Chinese government isn't guaranteeing this corner of the country's credit market, as was widely believed. The yuan's weakening has made it more expensive for companies to import dollar-denominated commodities to be used as collateral for loans created outside formal channels for bank lending




"If there's a string of defaults in China, there's no question that demand for copper and iron ore and other commodities where China's been a major driver would be threatened in a material way,"




And some analysts and investors say the magnitude of the recent price declines in copper and iron ore aren't justified because Chinese authorities are unlikely to allow the country's credit markets to completely unravel…"You've got the credit issue in China...and you've got also reasonably high iron-ore [stockpiles]," said Jimmy Wilson, for iron ore at BHP Billiton, on the sidelines of a conference in Perth, Australia. "Traders have a view that the price is going to go down so they do everything they can to hold back" on buying.”

At 170bps and with 155bps as a floor for the last 6 months, it seems like a cheap protection play on further Chinese/Commodity contraction


h/t Manal

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DeadFred's picture

Sucks to be in the crosshairs of ZeroHedge

slotmouth's picture

I don't hear Tesla shareholders complaining.

Soul Glow's picture

Arthur Anderson isn't compaining either.

James_Cole's picture

Citigroup just said Rio Tinto was still a buy lol, maybe that's a better short?

Pure Evil's picture

And when Jim Cramer speaks, nobody listens.

National Blessing's picture

Jim Cramer is more of a hired clown.  His job is to garner laughs.  I don't think people follow his financial advice.  Bitches.

Schmuck Raker's picture

I agree. Individuals that follow Cramer's advice should not be characterized as people. "Sheep" sounds right. Or..."Muppets"??

Soul Glow's picture

Citigroup?  Didn't they go bankrupt?

Ha, Anderson strikes again!

old naughty's picture

Oligarchs playing a decisive role.

Atomizer's picture

Tesla doesn't have electricity stations built across US. Obama is killing coal plants. NJ is the third state to ban direct auto sales. My tea leaves tell me that the electric car business is going to receive the same bitch slap as during the GM EV 1 Tom Hanks failure. 

Soul Glow's picture

Electric cars would do very little considering that the USA still runs most grids off of fossil fuel - coal/NG.

TruthInSunshine's picture

Financial Markets, especially traders and IBs in New York & London, are going to gnash their teeth and beg for a Chinese version of Hank "Tanks In The Streets" Paulson's TARP/TALF blank check bailouts, but it's already been decreed by the Chinese Premiere that THAT "ain't gonna happen."

China's Premiere just fired an ominous warning (buckle up, bulls) -

And so it begins; the "Economic Depression" that so many naive investors had thought Bernanke & his equally incompetent and/or malicious central reserve fractional fiat bankers saved us from gets an official renewal shot across the bow in the form of this warning:

Phillip Inman economics correspondent
The Guardian, Thursday 13 March 2014 16.29 EDT


- "World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall"

It's a good thing American and other multi-national firms don't do massive business in China, haven't invested TENS OF TRILLIONS in factories, plants & R&D facilities there over the last 19ish years, and that these firms and their shareholders have hedged accordingly.


Soul Glow's picture

Economics is a study based on unsound theories.  All will soon know.

Dollarmedes's picture

And I was waiting for a second high-profile default as "confirmation" for the other Chinese on the fence.

Looks like China's Premiere beat them to it.


DormRoom's picture

G7 will monitor, and coordinate.  There will be no financial crisis, unless the G7 disbands.

MrSteve's picture

Disbands, you mean from being the former G-8? Seems like only yesterday...

Pure Evil's picture

And just think, it was D.C. and Wall Street that was planning the downfall of China.

It's now looking like the shoe is about to transfer to the other foot.

Maybe with all that gold and stored commodities the Chinese feel comfortable with their market taking a dive and want to see if the US can survive the process.

To the presses Yellen my dear, this is a job for Super Inflator!

Just press ctrl+P about a quadrillion times.

Soul Glow's picture

Shanghai is 3 multiples lower than it was at the high in '07.  US equities are back at the highs.  China decided not to leverage stocks.

You aren't a trader, are you?

Offthebeach's picture

China is too big to fail. Mr. Yellen will bail them out.

Has the Hitler Downfall commodity YouTube come out yet?

SAT 800's picture

The author is naive. it's probably Glencore who are driving the price down. That's the problem with Mercura buying JP Morgan's trading desk; now there are three players who can all play nice with each other and fuck you; and they're entirely without oversight.

SDRII's picture

John Mack just joined the board: bad omen. 

What trading firm was behind that Libyan Cargo? 

Soul Glow's picture

No.  Stack gold if you can, silver if you can't.  And go long platinum if you have balls.  I think platinum could be a huge payout.

Atomizer's picture

If you remember during Greenspan housing collapse, EBT folks were breaking into new home construction projects to steal copper and resell on black market. Not on my computer, Tyler's...pull up the story on the Chinese boat that sunk carrying copper. I think it was about two years old. It was a good laugh. 

Soul Glow's picture

It was meth heads.  Meth heads steal copper.  EBT folks sit on their sofas all day watching TV and sipping slurpees.

DormRoom's picture

Buying during this crash will be the best play over the next 20 years.

Stagflation or global, total war is the only out developed countries have left.  Both outcomes are favorable for the commodity complex.  The Great Moderation which had absorbed global inflationary pressure, also had a dampening effect on global deflation (breadth first traversal along nation-state nodes).  But the emerging markets can no longer absorbed deflation forces.  Hence the latent effect.  Societies are now buckling under the force.

Moreover, climate change (drought) has/will disrupt global agri-business causing realignments along the supply chain, which will be favorable for dry bulk shippers (every nation becomes an importer of wheat/fruits/vegetables/ etc). 


Keynes had favored anchoring a global reserve currency with a basket of commmodities for a reason.  It's also why China has been buying up commodities, and colonizing Africa:  They want to anchor the yuan as the new reserve currency using commodiites.

Soul Glow's picture

Japan is limit down.

jcaz's picture

China will let prices fall to $.0001 and sit on their stockpile until everyone is their bitch,  just to make their point-  no doubt they're laughing at the daily 400 point drops in their stock market-  just doesn't matter to them.

Soul Glow's picture

What is a dollar worth?

fasTTcar's picture

What is a Yuan worth?


All that matters is how many of them it takes to buy an ounce of real money.

Soul Glow's picture

What is fiat currency worth?

The dollar is the reserve currency, in case you weren't aware.

fasTTcar's picture

I would argue that the real reserve currencies are oil, gold, rice and timber.

How many fiats of what ever flavour (correct spelling) are only how they are denominated.

Soul Glow's picture

Trees grow, rice grows, oil and gold do not.  Oil is also not easlily transportable - gold is.

Gold is money, and nothing else is.

TruthHunter's picture

 "Oil is also not easlily transportable - gold is."

Oil is easily transportable if you have a tanker.

Gold is easily transportable if you have an armored car and guards.


All things I don't have.

Pure Evil's picture

About, the length of time it takes to wipe a Venezuelan ass.

I don't know if that's a lot cause they're out of TP.....

or if the TP runs out but you have a wheelbarrow full of dollars will you cup the ole hand or make a run on the wheelbarrow.

Dollarmedes's picture

"...the CFTC and DOJ are currently investigating commodities price manipulation..."

So they're investigating the Chinese manufacturers? 'Cuz I guarantee you they aren't investigating the people trying to stabilize copper even if they have to manipulate commodity prices to do it.

Dollarmedes's picture

This shit is just like the BoE; the government is begging their cronies to stabilize the market. But China is too big for that...that's why "this time is different."

new game's picture

how many more glencores are lurking in the hollows? credit in china has hit its' limit. but what are all the spin off consequence? another aig lurking...tags gm,wachovia,countrywide,lehman,chrysler(did i forget any?)

Pure Evil's picture

Yeah, you forgot D.C. and Brussles, bitchez!

Dr Benway's picture

There are many, many others. The level of corruption and outright criminality that is condoned in major Australian companies is hidden by regulator coverups.

Regulators cover up the crimes they stumble upon, so that Australia can keep its undeservedly good governance reputation. This governance reputation is effectively sold to criminals.

Wilcox1's picture

Is there a Walk-Thru on this play?

fasTTcar's picture


Step 1:  Buy gold and silver.

Step 2:  Sleep well at night.

Step 3:  Repeat.

Quantum Nucleonics's picture

Kind of idiotic.  Wouldn't just loading up on puts on copper futures be a more "leveraged" bet?

By the way, copper will probably find a bottom soon and rip of the faces of short sellers.  Remember, there are a bunch of countries that depend on copper exports.  Why wouldn't they step in to support their economies - even if it means destroying their long term finances.

Soul Glow's picture

After today I would not short copper.  Why gain 3% when you could risk 20%?  As of now I would bet my bottom dollar for gold/silver to continue its long term trend.  Oh, and that is up, by the way.

TheCosmicTaco's picture

Steel is made outta iron ore? Well whoda thunk that? I thought it was made out of green jelly babies.

Iron ore, huh? Stuff was $10 a ton in 1999, $100 a ton now. Anyone would think it had gold in it...