http://www.theaustralian.com.au/business
THE falling copper price — which has held its value much better this year than its metal peers, down just 8 per cent so far — will not bounce back any time soon, due to a series of one-off developments in China, which consumes 40 per cent of the world’s production.
That is the verdict of Michael Komesaroff, a leading Australian expert on China’s mining industry — a former Rio Tinto executive in Asia, who then worked for a major Chinese resource corporation — writing in new analysis for China-based GavekalDragonomics.
Over the past 10 years, he says, China’s consumption of refined copper has almost trebled, while consumption in the rest of the world has contracted by 6 per cent.
The metal’s high value to density ratio and the ease with which it can be stored for long periods has resulted in its widespread use as collateral in China, being pledged against relatively low interest hard currency loans.
This practice was driven by the People’s Bank of China raising in 2010 the reserve requirement for the commercial banks, effectively tightening domestic credit.
Mr Komesaroff says: “Speculators, mainly small and medium-sized companies with access to copper, pledged their stocks as collateral against US-denominated letters of credit issued by the domestic banks.
“This allowed the speculators to arbitrage the difference between low US dollar interest rates and higher yuan interest rates in China” — and then leverage those gains further, for instance by investing in shadow-banking products, often yielding returns of more than 10 per cent.
The volume of copper tied up in such deals has ranged from 500,000 to 1 million tonnes.
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