In the fourth quarter, approvals of letters of credit (LC) for copper imports have tightened after some banks struggled in the previous quarter to recover billions of yuan in loans made to the steel trade, traders and analysts said. Credit fell further this month as the year-end approaches, they added, squeezed from last December, when importers rushed to use up credit lines and booked large spot shipments, boosting imports to a record 406,937 tonnes of refined copper.
"Some banks now are definitely saying no to copper imports," said an official at a large Chinese trading house. "Domestic prices are lower than the cost of imports, which is a risk to the importer, as well as the bank. Banks are not keen to do risky business," said the official, who declined to be identified as he is not authorised to speak to the media.
The arbitrage between benchmark three-month LME copper and the corresponding contract on the Shanghai Futures Exchange, an indication of China's cost of imports, faced a premium of 839 yuan ($130) on Wednesday versus a discount of 72 yuan a month earlier on November 19. Investors importing copper as a financing tool have been the driving force behind imports in the past two years, as their profits from financing enabled them to cover poor price ratios.
But banks now see such imports as risky, as stocks in bonded warehouses in China have already grown to more than 1 million tonnes, said Jing Chuan, chief researcher at Citic Futures. "Banks are sensitive to copper imports now," he said. "Bonded stocks are high and some are stored there for months, meaning that the domestic market has been unable to digest them."
China's consumption of copper has slowed this year, in tandem with that of other metals, as an economic slowdown hit activity and squeezed domestic prices of the metal. Although China's real annual consumption of refined copper may rise 4.8 percent to 7.68 million tonnes this year, that is weaker than growth of 7.8 percent in 2011, 11.5 percent in 2010, 19.6 percent in 2009 and 11.8 percent in 2008, state-backed research firm Antaike has said.
But 2012 term shipments continued to arrive, prompting importers to store metal in bonded warehouses to escape paying tax and having to sell off stocks at the lower domestic price. "Some loans banks made (to the steel sector) this year they were unable to recover, therefore banks have been trying to give less credit to copper, hoping that would make their balance sheets look better," Jing said.
Most of China's copper importers got credit from local banks by putting down yuan deposits to back letters of credit denominated in US dollars, while some foreign banks provided LCs through Hong Kong. "We've begun to tighten control on loans over the past few weeks," said a senior executive at a foreign bank in Shanghai, who declined to be identified.
"For copper, part of the reason is that the rising stockpiles for the past two months has made the credit risk controllers more wary." A source at another foreign bank in Shanghai said Chinese banks were cutting overall credit in line with usual practice at the end of the year. Comments were not immediately available from Chinese banks that give credit for copper imports.
A trader at a second large Chinese trading house said end-users had received letters of credit for copper imports, but their purchases had fallen as they scrambled to pay off loans before the end of the year, cutting into available funds. China's annual imports of refined copper rose 39.7 percent to 2.91 million tonnes in the first ten months of 2012. But some supply is still in bonded warehouses, marooned by weak domestic prices.
Bonded stocks consist of refined copper cathode that has not been declared for tax, preventing the metal from being sold in the domestic market. The stocks are typically estimated by traders as China does not release data on their levels. Bonded stocks rose by about 50,000 tonnes in Shanghai from a month earlier to about 900,000 tonnes late last week, traders estimated. But stocks fell nearly 70,000 tonnes to about 120,000 to 130,000 tonnes in the southern province of Guangdong, home of some large end-users.
"Some clients told us they could not get letters of credit. They hope the situation could improve in January," a trader at an international trading house said, adding that the firm's sales of bonded stocks had fallen in the past two weeks. Plentiful bonded stocks and reduced buying had kept premiums low, around $40 to $65 per tonne over the cash LME copper prices, traders said, even though the bulk of term shipments for 2013 were set around $85 and $98 premiums. The 2013 shipments should start arriving in January or early February.