Copper Plunges Most In 3 Months As "Rehypothecation Evaporation" Concerns Grow

Tyler Durden's picture

Copper prices accelerated lower overnight and are sitting at 5 week lows following rapidly growing fears that the commodity warehousing probe will uncover exactly what we have been warning about for months - there is no 'there', there. As we explained in great detail here and here, the discrepancy of reportedly 80,000 tonns of aluminum and 20,000 tonnes of copper is sparking wholesale liquidations as carry traders, lenders, and borrowers all scramble to find out if their promised commodity is there. Iron ore, which has seen its price tumble dramatically, is also on the watch list as the port had said it was investigating whether iron ore warehouse receipts were fraudulently used multiple times to raise finance by different banks.



As we concluded yesterday,

So far it is unknown just what happens next: when it comes to copper and certainly gold, there has been a substantial downswing in prices. How much of that is attributed to CFDs unwinding is unclear. But the bigger question, and not just for gold prices, but for the Chinese economy is if indeed the funding deal house of cards is imploding, what happens to China's shadow banking system, which is extremely reliant on the billions in "rehypothecated" dollars emanating from non-existent metal collateral.

Because should the Qingdao port fiasco spread and be confirmed at all other venues that use commodities for funding purposes, then that may just be the straw that breaks the already weakened back of China's credit system. How the PBOC will respond to that may be just the variable that answers what happens to China's inflation, and thus to the price of the simple, unencumbered underlying physical metals in the coming weeks and days.

Stay tuned.

For those who want to learn more, please read "How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring"

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THX 1178's picture

Dr. Copper collapses in a pile on the floor. Call a doctor.

prains's picture

who's gonna make the Hello Kitty Vibrators now?

dontgoforit's picture

It has 'zero' value if there's none there to purchase.

thisisjustarandomusernameicreatedforzerohedge's picture

The value will increase though if there's now a rush to put the copper 'there'

Any company that previously lied about the stocks will now have to buy to prove their stock

combined with the cheap new liquidity and loans via PBOC there will be extra cash ready at the same time as extra demand for copper

it went down because the idea that copper as collateral is clearly less valuable than was perceived, so in the future it may longer be accepted as this as much, and therefor would hurt demand and so the price goes down. the contracts go down because there's no longer anything backing it.

however, it should also have upward pressure as a lot of this collateral will now need to be secured, so it could force a rush by those caught to lying about their stocks but especially those who haven't been caught yet and want to secure their copper before they get caught.

lastly, there could be some downward pressure just because no one really knows wtf is going on. these port warehouse districts are all a mess and everyone shits all over every numbers. the whole fake export/import stuff. the empty warehouses. the switcheroo goods to get lower taxes or fees. there's so many container, warehouses, contracts, balance sheets that basically have no fucking order and no real strict regulation about if they are what they're supposed to be... so this is like another one of those things but about copper, so that tarnishes copper a bit and the market, algos, whatever react/overrreact

Badabing's picture

repost from yesterday

So the Chinese beat us at our own game. Forced the price of gold down with Paper while buying physical!

But this Aluminum and copper fraud is very different. Anyone who supplies the physical can call the shots on price!

The normal outcome should be the paper price goes down because no one wants to be stuck with a worthless contracts and sells at any price. While the physical price skyrockets to meet demand for the metal they didn’t have with out disrupting industry consumption.

The only way we will not see a disconnect in price is with an under the table intervention. The suppliers will get some freshly printed fiat under the table as compensation. We still will see inflation as a side effect to unwind this monster.


Fake inventory = a disconnect in price or inflation.      Keep in mind that this is the third largest port!

Do you think port 1 and 2 is immune ?

CheapBastard's picture

"If you don't hold it, you don't own it."


Nothing new here. Be careful...Bail-ins, MFGlobalizations, Rehypothecations, and "I know nohting; I was relying on what my accountants told me" are all just around your corner too.

DeadFred's picture

We are talking about China here. A few widows get charged for the bullets that executed their spouses and some fake numbers get printed and all is well. The only way this gets out of hand is if the government wants it to. On the other hand my paranoid mind can think of several reasons why they would want it to.

Anasteus's picture

Anyway, I don't get it... why on earth copper is falling when the recent revelation has pointed to missing physical supply due to naked rehypothecation aka leverage? That's a standard supply squeeze, which means scarcity that should logically work in favour of physical metal.

So why isn't the price of copper going up? This doesn't make sense to me at all.


But... perhaps there exists an explanation, a bit weird though. The more amount of missing physical is publicly exposed the lower spot price must be managed... in order to grab copper from elsewhere as fast as possible and as cheap as possible to rebuild the physical supply and thus restore the fading credibility. A paperwork. This somewhat reminds me of FOFOA's words I couldn't grasp for quite a long time: "Gold is too valuable to be expensive."

DonutBoy's picture

I'm with you Anasteus - the headlines is a non-sequiter.  "Copper plunges ... rehypothecation evaporation concern...".  If in fact people have warehouse receipts for copper and they fear it's not there - then the result is everyone goes to the warehouse and asks for their copper.  

Now the flip-side is - if people with warehouse receipts are forced to settle in cash ("Well Sir, we don't have your copper available today, but you can buy it elsewhere - here's the full market value of your copper in renimbi...) then there are alot of vested interests who do want the price low to clear out the receipts that aren't backed by metal.  I think that's happening in gold right now.  I would have thought there was too much copper through the machinery of the global economy for it to happen there.


Anasteus's picture

Well, I also think that the recent case of metal evaporation and consequent illogical price plunge may somehow be pivotal for understanding of what's going on in the gold market. The case 'missing copper' likely has inadvertently exposed another hidden tactics.

thisisjustarandomusernameicreatedforzerohedge's picture

and up it comes from the jobs number... thought that alone will probably be fickle

but give the weekend to process the EU NIRP, US jobs, and this warehouse story

and then a PBOC stimulus announcement next week about further lowered rates and 'forced' lending and liquidity injections

maybe toss in another upward-trending hard data report on railways or electicity

and we could see 3.15 again

Buckaroo Banzai's picture

We are seeing Stage 1 of the process. Stage 1 is, paper prices plummet as everyone who doesn't HAVE to own copper for legitimate industrial uses flees to the sidelines. Stage 2 is, physical prices surge as warehouses scramble to produce the actual physical copper for their industrial customers who actually use it.

Where the price ends up is unclear. Do the warehouses primarily store copper for paper speculators, or industrial users? If industrial users largely held their own copper on their own property, then the price will stay down. If industrial users largely held their copper in the warehouses, and that copper was rehypothecated beyond what is actually required to satisfy physical demand, then the price will rise above the pre-crisis levels.

_ConanTheLibertarian_'s picture

Excellent question. It would be great if ZH could find out more about this.

KnuckleDragger-X's picture

Considering manufaturing is swirling the toilet I don't think phys is going to be a problem but this was collateral so somebody is going to get really bent over covering this.

Panafrican Funktron Robot's picture

"Any company that previously lied about the stocks will now have to buy to prove their stock"

Pretty sure the contracts are going to end up being cash settled.  Think the ABN AMRO gold default model.  

Copper is being sold off because we're talking about paper copper, not physical.  If I own a paper contract for an underlying claim for physical, and that underlying claim turned out to be bullshit, I would sell that paper contract at whatever I could get for it.

Also, demand for physical copper is not as high as you would think, consider the "real economy" and re-assess what the physical demand actually is.  The real/verifiable base metal stockpiles (esp. in China) are still several multiples of what an un-fucked market would actually demand.  They may have a geopolitical strategic idea in mind around stockpiling common resources, but from a current supply/demand standpoint, supply is absurdly higher than demand.  


Sudden Debt's picture

Maybe woman will now buy the American All Bundy vibrators?

Headbanger's picture

Calling Doctor Howard, Doctor Fine, Doctor Howard!

Nyuk nyuk nyuk..

Took Red Pill's picture

so there's a lot less copper than they thought and the price goes down?

EscapeKey's picture

Paper contracts are worth less, so they're sold.

Nevermind that it's supposed to have some sort of connection to actual, physical metal.

tarsubil's picture

Someone on here once made the prediction paper gold would go to 0 while physical price exploded. Bonkers.

Panafrican Funktron Robot's picture

This is broadly in line with the FOFOA opinion based on their understanding of the market function, ie., the paper price crashes when the underlying contracts are "discovered" to not be sufficiently backed by the commodity in question.  Those underlying contracts would be cash settled similar to the ABN Amro default; this would collapse future demand for paper operating under the same scheme.  I personally think the drop in gold price is largely reflective of the distrust in the underlying value of the contracts in question.

_ConanTheLibertarian_'s picture

Could very well be. I'd say there's actually going to be two prices, one for physical and for paper. This in gold and silver but perhaps in other metals too.

thisisjustarandomusernameicreatedforzerohedge's picture

yes and no... potentially =/ yeah not a good answer i know... just trying out the 'ole tea leaves. truthfully, i dunno if it should go up or down... it could be either because there's pressure for both. depends how bad either is.. and that's the bad. we're not really sure yet, and that alone is bad and confusing news... so that's really what drove copper this week -- not really how this fundamentally impacts copper as collateral in china but the market just saying bad news is bad and we don't effing no what to do yet, so sell sell sell


between us jobs data just now, ECB NIRP, and probably more PBOC stimulus in june... copper should recover a bit next week or the week after

and should have an OK summer if the PBOC is serious about stimulus and avoiding a hard landing (though that just means the eventual fall will be from an even greater height so the threat will just be delayed)

gcjohns1971's picture

Just an opinion here...

But the issue is not what convolutions will happen amongst the thieves in the corrupted market when their crimes are discovered.

The demand did not change. The supply was shown to be less than thought.

Steady demand. Lower supply. Price rises.

To the extent the price isn't rising it is an indictment of not just of the warehouse who didn't have the material they said, but of the market itself. The market is allowing AN INCREASE in naked trades as a result of the discovery that someone was a fraud.

This activity is the cockroaches scrambling when the light has been turned on.

The dropping price is not the price of the metals - because there aren't any metals there. It is the price of the market itself.

It is the demand for the market's paper that is dropping. Because everyone now knows there are no metals there.

The extent that this is accepted as a market price for METALS is the measure of the extent of the fraud not yet exposed. The unexposed frauds are the ones who continue to propose that paper promises and physical reality are interchangeable.

They are not interchangeable, thus the dropping price of paper.

fattail's picture

If I get a loan and claim to have the physical as collateral for a loan, would not I or the bank then sell the paper to hedge my collateral?  if I can't make delivery i need to buy back my contract, forcing the price up?  

It looks like more manipulation or maybe just front running the chinese economic credit contraction/hard landing.

disabledvet's picture

Dr. McGuilicuddy's sounds about right.

Iron Ore headed to twenty bucks a ton?
That'll stick up the phuckers' asses mighty good.

Wanna see West Virginia become the next Saudi Arabia? "Morgantown" as it's Capital?

Works for me just fine.

Elon Musk can build the nickel-hydride plant right there...just like everyone else is doing.

Here they have a "rocket town" there too.

KnuckleDragger-X's picture

Thank god nothing like that could happen here. /sarc

Dre4dwolf's picture

And copper bullion is still 6$ a lb... out of all the metals, I think copper is the most disconnected from market valuations, the paper price is pretty much meaningless when its over 100% off from the "real" price.

disabledvet's picture

Wait until it hits a buck.

dontgoforit's picture

Copper has been 'disconnected' since the CA teachers retirement fund drove the price to sky heights several years ago.  It was time for a fall - long since time....however; the supply side of this says 'up' not 'down' so it fits the current disconbobulation of everything else: upside down and inside out. 

What does Stevie Wonder and a tampon have in common?  Uptight, out-of-sight and in the groove. 

Oldwood's picture

One can't but wonder about the massive importation claims of gold by China. How much of it is "there"?

Took Red Pill's picture

and that will make the price of gold collapse?

disabledvet's picture

If I can get copper out of the ground profitably for a buck a ton you're god damn right it will.

Pool Shark's picture



Well it only costs $5 to dig gold out of the ground,... right?  ;-)


Oldwood's picture

Paper gold yes, if we think its only paper and there is no gold to back it.

buzzsaw99's picture

so the metal is missing, which drives the price DOWN? Okay, i guess we live in bizarro world, I can accept that. worx that way 4 gold anyway

Hail Spode's picture

Yeah I was wondering how far the price will drop once we get down to 1 KG available for the whole world.  What will that last KG sell for, a (zinc) penny?

quasimodo's picture

It will just get thrown in the streets

tmosley's picture

Paper to zero, bitchez.

disabledvet's picture

The debt...not the DOLARES.

colin's picture

why does price fall when it is all gone? how do the kenysians explain that ?

Oldwood's picture

Maybe for the same reason we don't want fake money? The value declines if its not really there.

dontgoforit's picture

It's ok.  Let me hold five 'til Tuesday.  Need a BJ and a beer.

praps's picture

If you have a paper claim on a pile of copper and you're not sure if that copper is there or not best to sell the claim, then it doesn't matter if it's there or not.

lakecity55's picture

!! + 10

And, since everyone is trying to dump, the price goes south.

fattail's picture

And since there isn't enough collateral, and we won't make any new loans or roll the ones we have with no collateral; do you guys mind if I front run the coming chinese credit contraction?

lakecity55's picture

The only thing I can think of is that since they can't trust the paper metal, it starts to lose it's value.

Joe Blow enters the bank. "Hey, I have a copper cert here, worth 1 million yuans." The banker says "Dude there is too much fake copper paper out there. I will only give you 1/2 million for it."

Meanwhile the real copper is sitting in a warehouse somewhere with dobermans around it. But since 5 guys have the same metal on paper, it is worth less until it all shakes out and they find the actual copper.

This seems to be a great lesson in Paper Value setting the price of physical material.

shovelhead's picture

But the lesson never gets learned until someone with juice says "Hey...Wait a minute here."