The deflationary tsunami is rolling in and equity markets are still playing on the beach. From Luke Kawa at bloomberg.com:
Virtually every aspect of the commodities bust has a China angle.
Forecasts for China’s consumption of raw materials have proved wildly optimistic, while domestic production of certain resources have resulted in particularly severe gluts in commodities such as steel and coal.
But in one respect, China has been putting an artificial degree of upward pressure on a select resource—copper—sparing it from the worst of the rout in commodities.
For years, traders on the mainland have used copper as collateral to finance trades in which they borrowed foreign currencies and invested the proceeds in higher-yielding assets denominated in renminbi. This carry trade with Chinese characteristics allowed them to net a tidy profit.
(As an aside, however, the devaluation of yuan in August prompted analysts to wonder whether this trade has reached its best-before date—something that would have implications for the future global demand for copper, if true. Meanwhile, there have been persistent rumors of regulators cracking down on such trades.)
This practice of warehousing copper to help engage in financial arbitrage “inflated demand, kept prices higher, and led miners to raise output,” according to Bloomberg Intelligence Analysts Kenneth Hoffman and Sean Gilmartin, who sought to identify the extent to which demand for copper has been buoyed by its use as collateral for such trades.
To continue reading: China’s True Demand For Copper Is Only Half as Much as You Think
