Copper and iron ore prices have fallen sharply due to concerns about slowing demand in China. However, traders said that the recent devaluation of the renminbi has also aggravated the decline of these two commodities. China is the world's largest importer of copper and iron ore.
Due to the exhaustion of domestic traditional financing channels, some enterprises use imported copper and iron ore as loan collateral, and the decline of RMB has hit such enterprises. For borrowers and lenders, the risk of this financing method is increasing, which also brings further pressure to the slowing economy of China.
On Tuesday, driven by the depreciation of the RMB, copper prices continued to decline, hitting a seven-month low. On the Shanghai Futures Exchange, the benchmark March copper futures contract closed down 2. 1% to 46 250 yuan (US$ 7,532) per ton. At the close of the China market, copper futures on the London Metal Exchange fell slightly to $6,677.75 per ton.
According to the data of iron and steel index, the benchmark price of imported iron ore with 62% taste in China Tianjin Port [-9.97% fund research report] has dropped by 8.3% since this week, with little fluctuation on Tuesday, reaching $0/04.90 per ton/kloc. On Monday, the benchmark price hit the lowest level of 20 12 since June, and fell by 1 1% since the beginning of March.
Jin Chao, a senior analyst in yongan futures, said that although the real reason behind the decline in commodity prices is the economic slowdown in China, the recent depreciation of the RMB has brought great pressure to those who can't find other financing channels and can only use copper financing to raise funds.
Some enterprises use copper and iron ore as financing collateral. In the past five years, copper financing activities have been particularly rampant in China. In typical copper financing activities, enterprises use copper as loan collateral, and the raised funds are used as working capital or for higher-yield and more speculative investment activities. It is difficult for small real estate developers to get loans from banks, so they usually import copper from overseas in US dollars and deposit it in China as collateral for RMB loans.
If the copper price rises or remains stable, enterprises can sell copper on rallies and profit from it, and the proceeds from the sale can be used to repay loans. But if copper prices fall, borrowers will be at risk.
If the RMB depreciates, enterprises that use such funds as working capital may not be affected, but borrowers who use copper financing for speculation may be discouraged, which will prompt them to sell copper, thus pushing down the price of copper.
After a cumulative appreciation of 2.9% last year, the RMB has fallen by 1.4% this year, a great drop.
Jin said that due to the weakening of RMB, copper prices fell even more, and Chinese banks began to reduce related businesses, which further worsened the situation. As banks' willingness to accept copper as collateral declines, companies that need financing have to find other ways, so copper imports for financing purposes are expected to decline.
Executives of Australian mining companies BHP Billiton Ltd and Rio Tinto PLC acknowledged similar problems in the iron ore market on Tuesday, saying that concerns about China's credit crunch and increasing inventory trends pushed the market down.
The above comments further prove that the problems of China's financial system are spreading to areas other than real estate and banking (the representative industries most sensitive to the credit crunch), and are having an impact on overseas economies.
Cheng, an analyst at Barclays, said that these factors may provide opportunities for people to depress the price of copper in London. He refers to the recent drop in international copper prices.
In China, many analysts regard the recent slowdown in copper prices as a belated trend. Due to the domestic economic slowdown, the prices of natural rubber and other commodities have fallen for a long time.
Jin said that there has always been a high correlation between copper price and natural rubber price in Shanghai market, but last year the trend deviated, and natural rubber fell even more. He added that copper financing demand was a key factor supporting copper prices in the past year.
Last year, the copper price of Shanghai Futures Exchange fell by 18%, and the price of natural rubber fell by 35%.
Jin said that it was only recently that the plight of the copper bear improved.
Although the copper market attracted much attention at first, as the price of copper began to fall last Friday, investors' attention shifted to the larger iron ore market.