China easing fires commodities bulls
The government-induced credit crunch in the Chinese commodities industry is ending, according to western traders, triggering a wave of bullishness about the outlook for industrial raw materials.
Beijing’s clampdown on lending cast a pall over commodity markets in the second half of last year, with the benchmark price gauge, the Reuters-Jefferies CRB index, falling as much as 21 per cent from a peak in May.
Leading western trading companies said, however, that in recent weeks their Chinese trading partners had started to gain easier access to credit, allowing them to make larger purchases of commodities.
“ Sales of copper to China are currently at the highest we have seen over the past year,” a senior executive at a large trading house told the FT. “Credit is easing in China and that correlates at a later stage with stronger growth.”
The change in credit conditions in China, the largest consumer of commodities from iron ore to soyabeans, has helped to reverse the gloomy sentiment among natural resources investors that took hold in the final months of last year.
Copper, one of the sector bellwethers which counts on China for 40 per cent of its demand, has rallied 16 per cent in the past six weeks and on Wednesday touched a four-month peak of $8,455.25 a tonne.
Investor positioning in the US futures market last week turned bullish on the metal for the first time in two months, according to the Commodity Futures Trading Commission.
China’s imports of refined copper hit a record in December, and traders and analysts expect imports to remain strong in the next few months, although they are likely to drop slightly due to the lunar new year holiday that ends next week.
In particular, traders said that “letters of credit” (LCs) – debt instruments commonly used to finance trading – were becoming more readily available in China. “We’re hearing from various areas that they expect after Chinese New Year to have more capability to open LCs,” said Simon Collins, head of refined metals at Trafigura, the second-largest metals trader.
That shift has prompted an increase in the number of traders using commodities imports to raise
money – reselling them quickly to use the proceeds to invest in other ventures before repaying back the loans – a practice common in 2009-10.
“All these people are using copper as a form of collateralised borrowing,” said Michael Jansen, metals analyst at JPMorgan.
Nonetheless, the easing in credit conditions remains gradual. Ric Deverell, head of commodities analysis at Credit Suisse and a former economist at the Reserve Bank of Australia, said: “They wanted to slow things down; they did slow things down. Now they’ve got the economy to where they want it they are easing policy. It’s not stimulus, it’s just taking the foot off the brake.”
Moreover, traders remain wary of the potential for fresh turmoil in the eurozone debt markets to derail the commodities rally.
“The funds want to be bullish copper, but at lower levels,” said Mr Jansen.
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