Traders are busy processing transactions on the trading floor of the Shanghai Futures Exchange. Photo: IC

Graphics: GT

 

Copper contracts on the Shanghai Futures Exchange (SHFE) fell by close to their 5 percent daily limit Wednesday, amid weakening Chinese demand and fears over the health of China's financial system.

The most-traded copper contract for May on the SHFE closed down 3.1 percent at 44,600 yuan ($7,258) a ton on Wednesday, its lowest level in more than four years.

The fall was driven by several domestic factors, including disappointing economic data for February, the default of a domestic bond and a rise in copper inventories, Yang Maijun, chairman of the SHFE, told a press conference Wednesday on the sidelines of the ongoing annual session of the National People's Congress, China's top legislature.

The domestic price drop mirrored a fall in international markets, with three-month copper on the London Metal Exchange also falling to a nearly three-year low of $6,376.25 per ton during Wednesday trading.

"A series of weak economic data for purchasing managers' indexes and exports have diminished Chinese demand for copper, which is used in manufacturing products from smartphones to autos," Li Xiaobei, a cooper analyst with Ji'nan-based commodity consultancy Sublime China Information, told the Global Times Wednesday.

The US Federal Reserve's tapering of its quantitative easing program has also led to a rise in the US dollar and put pressure on commodity prices denominated in the dollar, she said.

However, China's first-ever bond default played a bigger role in the domestic slump in copper prices, as copper is often used for financing purposes in China, Li noted.

Shanghai Chaori Solar Energy Science and Technology Co said on March 4 it would not be able to pay the interest on a loan, with the interest payment being due on Friday. The default has been widely seen as a sign of credit tightening in China, which will affect traders that use copper as collateral for loans, analysts said.

China, the world's top consumer of the metal, imported 379,000 tons of refined copper in February, down 29 percent from January but up 27 percent year-on-year, data from the General Administration of Customs showed.

"Part of the copper imports has been used for financing rather than industrial raw materials," Fan Yanxia, an analyst at Hangzhou-based commodity information website 100ppi.com, told the Global Times Wednesday.

At the end of 2012, copper inventories in China's bonded warehouses had reached more than 1 million tons, with over 95 percent of them used as collateral for loans, Jia Yan, an analyst with Hangzhou-based Yong'an Futures, estimated in a research note published Tuesday.

Analysts have expressed concerns that traders could dump their copper supplies on the market if their loans are not renewed amid the tightening credit environment.

Given the dim prospects for copper, speculators are also likely to sell copper as early as possible to avoid losses, Li said, which will accelerate the fall in prices.

Banks have started to pay attention to potential risks from falling commodity prices, but have not yet taken any concrete measures for the copper-backed financing sector, Guangzhou-based South Metropolitan Daily said Tuesday, citing an unnamed source in the banking sector.