Chinese banks are in the business of extending loans to people against copper inventories. It gets better.
FT Alphaville said it best:
…buy copper on credit, take delivery of said copper, sell said copper at full price to market, then post the returns in higher yielding assets until the due date for the full payment of the letter of credit arrives — in most cases some 180 days later.
Get it? In other words, the Chinese are extending credit for the explicit purposes of commodity speculation, not so much different than our banks blowing up the housing market with hot money to homeless guys in need of a Mcmansion. Moreover, this sort of fucked up banking is not exclusive to just copper. Basically, ALL COMMODITIES CAN BE USED AS COLLATERAL for cold hard cash. Essentially, people have 180 days to pay for the copper once it’s delivered into the country—“inventory financing.”
Now you know why copper demand is so high. However, the billion dollar question is: where is all that “inventory financing” money going? And, what will happen to said investments should the price of copper begin to unwind and trade lower?
1 year chart- copper
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A repeat of the carry trade unwind from last decade!
Isn’t Japan blowing up going to give all these Chinese copper hoarders a place to sell their copper to?
It’s the equivalent of leveling a few cities at the height of the housing bubble. It would have diffused the housing bubble for a few years and allowed the carry trade to keep going.