Chinese Copper Conspiracy Unveiled
China is NOT selling copper! I repeat, China is NOT selling copper! In fact, it’s buying a lot of physical copper.
So why does everyone think China is selling copper lately?
Well, one particular Chinese hedge fund has recently been selling many of its copper futures. This selling has driven down the price of copper on the futures market to a 5.5-year low at around $2.50 a pound.
Therein lies the confusion for many investors when trying to understand copper and many other commodities – sometimes the physical market and the “paper” world of Wall Street with futures, options, and other financial play things, don’t align.
China Is on a Buying Spree
First, let’s talk about copper and China in the real world.
China’s imports of unwrought copper and other products hit an all-time high in 2014 of 4.83 million metric tons, according to data from China’s General Administration of Customs.
With the copper price plunge, this buying by China will only accelerate – the country is known for opportunistic purchases of commodities.
The country’s State Reserves Bureau will likely step in and start buying soon. The Bureau is responsible for maintaining strategic stockpiles of materials needed for China’s economy. Bloomberg estimates that the Bureau accumulated about 500,000 metric tons of copper in 2014.
In fact, the buying has already started. The premium paid above London Metal Exchange (LME) futures prices for delivering copper into Shanghai soared by 33% since December 25. According to SMM Information and Technology and Bloomberg, this is the highest price in two months.
This brings us to an interesting part of the copper story… the plunge in the copper future prices last week.
Selling the “Paper” Bits
Selling copper futures started on the LME’s electronic exchange, spread to Shanghai on January 14, and then came back to the LME’s regular session. This was just the right time to start a mini-panic, too, as volumes are thin before the London and New York markets are open.
The move was also timely because physical buying of copper in China usually drops before the start of the Chinese New Year. Not to mention the negative psychology in the commodities markets, thanks to the plunge in oil prices.
So, who were the culprits behind this sophisticated move, crushing the price of the world’s most important industrial metal?
Chaos in Shanghai
You can thank a Chinese hedge fund by the name of Shanghai Chaos – appropriately named, I’d say.
Shanghai’s move was sophisticated, not just because of the timing (8:00 p.m. in New York and 1:00 a.m. in London)… but because the fund was well aware of the impact a big selloff would have on the big investment banks’ copper-hedging programs.
In effect, they forced some of the big boys to join the selling barrage.
Joining Shanghai Chaos in the assault was another Chinese hedge fund named Zhejiang Dunhe. That fund is run by China’s version of George Soros, Ye Qingjun. In 2003, he bet on a bull market in soybeans (using futures) and turned a small mortgage taken out on his house into a $1.6-billion fortune!
But the point I’m making here is that even though physical demand may be strong for a particular commodity, over the short term, financial players can push futures prices down, and down big.
In other words, the metals markets’ prices you’ve seen on CNBC are often the result of trading in the paper market (futures, etc.), not real-world physical demand.
That has changed completely in the past few decades. In the past, commodity trading reflected actual physical supply and demand both over the long and short term.
But now, the short term is in control of short-term traders. Even the Chinese are getting in on the act and influencing the markets by playing Wall Street’s game.
The good news for patient investors is that eventually fundamentals come into play and, over the long term, determine the price of commodities. But over the short term, the market can be moved around by the players in paper for longer than you may think and longer than your money may last.
And the chase continues,
P.S. Follow me on twitter @TimMaverickWSD!