As much as it may sound barmy to stockpile commodities to obtain better terms on financing, Michael Pettis claims that’s one of the factors behind what looks to be unduly aggressive purchases of copper by the Chinese. An excerpt from his latest newsletter, courtesy Michael Shedlock:
China had been importing for many months far more copper than was needed for real use…. Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China’s value-added tax.
Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses. Why? One possibility of course was pure speculation…
It turns out, that the copper purchases were not entirely, or even mainly, speculative. They were part of a financing scheme for companies that….were having trouble accessing bank credit.
Credit-starved companies were importing copper because they could obtain trade finance or some other sort of foreign financing, and then used the physical copper (or warehouse receipts, I guess) as collateral for domestic borrowing. The financing was continually rolled over. Buying copper was just a way to borrow for companies that needed loans and were otherwise unable to get them.
As I mentioned two weeks ago, when I discussed this in February with a senior executive in a major commodities company, he responded by saying that he thought the same thing might also be happening in soya…
Here’s how it works. Even when London prices are above Shanghai prices, companies eager for loans are importing copper in order to get back-door financing, whereas local traders, noticing that domestic demand isn’t strong enough to justify those import quantities, and perhaps eager to arbitrage the prices, are selling copper abroad. The weird distortions in the banking system, where credit isn’t rationed by price but by quantity and hierarchy, has turned China, at least temporarily, into a revolving door for copper imports and exports.
There is more on Mish’s blog, and as he indicates, even more in the underlying Pettis newsletter. Note that there have been reports for some time of stockpiling of base metals as a popular investment among private business owners. So any recent hoarding, whether for investment or to obtain funding, presumably is in addition to these uncertain but presumably not insignificant hidden reserves.
Update 6:00 AM: jck doubts that the numbers add up to much and as indicated in comments, the mechanism has me a bit perplexed. However, Pettis does have good contact, and I’m curious to see whether readers have corroborating information.