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What is the reason for the fall in copper price?

What is the reason for the fall in copper price?

In May, the copper price on the London Metal Exchange (LME cash settlement) decreased significantly and was even briefly below the US$ 6,000/t mark at the end of the month. It closed the month around US$ 6,000/t, about 7 % below the level at the end of April 2019 (US$ 6,442/t).

Copper as collateral for a loan

Since China is the largest consumer of copper, this situation is connected with it, and apart from the traditional use of copper in China, it is used as a pledge when financing various deals and constitutes a significant part of China’s demand. The Chinese authorities decided to conduct an audit of stocks in copper warehouses, which in fact was the reason for the decline in demand for this metal. The reason is that the Chinese authorities have recently opposed the use of copper as a pledge because such transactions do not take risks fully into account and this has already once caused a default.

Many companies in China use such a system quite often because in this way they get access to cheap liquidity. This is of particular relevance despite the fact that financial authorities are very actively struggling with excessive lending.
Such schemes are used by firms very simply: since the yuan is generally stable, they borrow currency at a low-interest rate, such as the US dollar, by converting it into investments in the most profitable local instruments. Such operations were very profitable precisely when for several years the yuan strengthened against the US dollar.

Uncertainty with the copper price

That is why most traders fear that the use of tough measures in relation to credit loans secured by copper can lead to a sharp drop in demand for it, and, consequently, a decrease in its price. In addition, in the event of a decrease in the copper price, the pledge of Chinese companies will depreciate and this copper will need to be sold. This will cause oversupply in the metals market.

Despite this long-term forecast for the cost of copper is positive


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