It started with Shanghai Chaori Solar Energy (002506: CH).
Two weeks ago, the company said it might not be able to make a payment to investors on a ¥1-billion ($164-million) bond. Chaori Solar was supposed to make an interest payment equivalent to $15 million on the first week in March, but was only able to raise roughly $650,000.
The company has posted losses for two consecutive years, so not having the money wasn’t completely unexpected. The case of Chaori Solar is slightly different, however, because this is the first default of its kind for China.
Previously, local government has swooped in for companies in similar situations, providing monetary solutions in the form of bailout funds, or extended payment deadlines. The lack of government assistance has signaled something new that hasn’t been seen up until now: China’s willingness to allow selective failures to occur.
So how is this related to copper prices? Because of the way Chinese companies have been using the commodity as an investment tool. Chinese companies that have difficulty getting conventional loans have been importing copper in large quantities, and using it as collateral to secure low-interest loans from investors. Once the company has secured the loan with the copper posted as the collateral, they are free to use it however they like – in business operations, or even for dabbling in higher-yielding assets.
The downside for companies using it in this way seems minimal, because it’s used in nearly every sector of the economy, from manufacturing to transport to construction. At the very least, companies would have a surplus of a material they would use eventually, right?
While this could be true, China is the world’s biggest consumer of copper, accounting for 40% of global demand. Everyone in China has a lot of copper.
The copper market faces one concern: Some of China’s “copper collateral” that has been stockpiled could be sold off if there are more selective defaults permitted. A repeat of Chaori Solar.
The fear of this scenario has brought the price of copper to its lowest in four years.