Chinese bonded copper stocks and financing deals:: Macquarie Research,

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Chinese bonded copper stocks and
financing deals
 This week we review the use of copper imports into China as a way to access
finance.
 Based on Macquarie’s discussions with different warehouses, we believe
there is around 550kt of copper sitting in bonded warehouses as at mid April
2011, virtually unchanged from mid March this year, but significantly higher
than the level at end 2010 of estimated 400kt and averaging 200kt-300kt in
the past.

 More than half of the material sitting in the bonded warehouses belongs to
trading houses using copper imports as a method to get cheaper sources of
finance under the terms of a letter of credit. The rest of the copper is bought
directly by domestic consumers from overseas suppliers.
 Most of the material sitting in bonded warehouses in China is available for
sale, so once the arbitrage starts to move in favour of import, the bonded
stock could easily become customs cleared and sold onto the domestic
physical market.
 The government has tried to crack down on these deals in recent weeks;
however, we expect this move will be largely unsuccessful. According to
recent government policy, from 1 April 2011, Chinese companies that re-sell
copper in bonded areas without customs clearance will be regulated to leave
their USD received from the sale to a required deposit account at the bank.
The earnings will be frozen for other purposes of use until the expiry of the
letter of credit.
 The central government’s attempts to curb Chinese import financing in this
way is unlikely to work, because most of the companies doing copper
business in China have offshore accounts. They could easily get away from
the regulations if copper is resold in the bonded warehouses under their
offshore company rather than their domestic enterprise registered in mainland
China.
 Therefore, we believe the impact of this regulation will be quite minimal in
terms of supply pressure on the domestic physical market.
China steel run rates remain high, but where’s the pricing
power?
 Chinese steel production continued to run at elevated levels over March, with
only a very moderate decline from January and February levels. In this article,
we look at the steel data for Q1 and what the implications are for utilisation
rates at steel mills.