(Minews) - Chinese copper smelters could start exporting cathode as soon as next month as a falling yuan and negative arb makes import financing deals unprofitable, according to Citrine Capital Management.
Speaking on the sidelines of the Metal Bulletin International Copper Conference in Milan on Tuesday March 11, Citrine Capital’s head of research Andreas Hommert said that the deteriorating economics of copper financing could lead to a resumption of exports from copper smelters under tolling licences.
While traders are unable to export copper cathode, smelters are able to sell all the metal contained in imported concentrates back into the export market.
The last time smelters did so in large volumes was in April 2012, when Jiangxi Copper and others sold more than 100,000 tonnes in the export market in order to squash a backwardation in LME spreads.
“You’d think that some of the Chinese smelters will be savvy enough to see that they can pick up material in the domestic market at steep discounts that they could buy to fulfil their domestic downstream contracts, and then export as much as they can on the tolling book, because it will be very profitable for them,” Hommert said.
“I don’t know how quickly they will latch on to this opportunity but I would think, because there is so much concentrate available, it could be bigger than the last biggest spike [in monthly exports],” he said.
The negative arbitrage was already having an impact on demand in February, when China’s unwrought and fabricated copper imports fell to 379,000 tonnes, down 29% from January’s highs of 536,000 tonnes, but still up 27% year-on-year.
The ten-day drop in the yuan has taken away a key source of profit for financiers using dollar-denominated letters of credit (LCs) to import copper and other assets in order to sell them in the domestic market, Hommert said.
The currency move has compounded losses arising from the deeply negative arbitrage between London Metal Exchange and Shanghai Futures Exchange copper prices, Hommert said.
“The arbitrage trade alone [had] been halting the trade, but now you have this currency volatility on top of it that takes away a half or a third of the economics that have been there historically,” he said.
Collecting returns from an appreciating yuan has been a core component of the economics of LC deals and most financiers viewed the currency trade as a one-way bet, he said. “I don’t think many traders involved in this trade have ever hedged the RMB, because [yuan appreciation] was a given. It was a total consensus in China that the RMB would always appreciate, never depreciate,” he said.
But following the ten-day drop in the yuan, those traders will be facing an annualised loss of 75%, or $210 per tonne of copper, if material was bought at $7,000 per tonne on a 180-day LC, Hommertsaid during a presentation to delegates on Tuesday. “That [depreciation] alone destroys a big part of the economics because even if you didn’t get caught out [by] the move down, if you want to put a new financing deal on you can no longer assume the RMB will appreciate in a steady way,” he told Metal Bulletin.
“I don’t think [LC deals] will stop but if it was pure economics, that should kill the trade. But we do know there are some people that use crazy assumptions of what the RMB cash will be worth for them.”
