The first domestic bond default in China. It’s still too early to jump to conclusions that the default by Chaori Solar (a solar company) is equivalent to the Bear Stern moment that took place in the United States in 2008. But concerns that the Chinese government will no longer bail every company out, and that bond yields aren’t risk-free, have stirred worries of tighter credit in the future.
Copper and iron ore fell sharply recently. In China, copper is used as collateral by companies and investors as a way to go around strict lending standards. According to Wall Street Journal, companies will obtain letters of credit from banks to import copper, which will then be sold or used as collateral for borrowing money, and often invest in high-yielding assets before paying back the loan. So if credit is tightening, and commodity prices are falling, banks may not take such commodity as collateral going forward.
How much do these financial transactions account for total copper imports? The data varies significantly. Credit Suisse analysts estimate around 33%, while other analysts and traders estimate 60% to 80%—investors can pretty much say no one really knows the magnitude. Although iron ore and zinc are sometimes used, copper has been a preferred choice, according to an article from Reuters.
As a share of total dry bulk shipment volume, China’s copper imports aren’t much compared to coal and iron ore. In February, China imported ~1.2 million metric tonnes of copper, while the country imported 61.24 million metric tonnes of iron ore. We could see some impact on dry bulk demand, but not necessarily a catastrophe. The market was perhaps more worried about what could happen if banks ask borrowers to put out more collateral amid falling copper prices. Since a lot of the money raised through this financing deal has been put into real estate, according to a Reuters article, if borrowers can’t pay, perhaps the real estate market might turn down as people realize the government won’t be there to clean up everyone’s mess. So China’s copper imports have affected DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM) as well as the Guggenheim Shipping ETF (SEA).