Copper industry slowdown
The economic slowdown and the unwinding of metal financing deals in China are major contributors to the current slowdown in the copper industry. China, which accounts for more than 40% of global copper consumption, largely drives the slowdown in global copper consumption.
Metal financing unwinds
Chinese authorities cracked down on the metal financing deals. Expected to exceed 150 billion, these deals represent one-third of China’s short-term foreign exchange borrowing. In the last few quarters, China has shed increased scrutiny on these metal financing deals. It also tried to plug the loopholes, which led to the emergence of shadow banking. The above chart shows the key features of China’s shadow banking landscape.
Several fraudulent trades were discovered in these financing deals. For example, there were instances where the same metal was pledged more than once. These fraudulent deals are expected to exceed $10 billion, which led to litigation from leading banks like Citibank (C).
Impact on copper industry
A large amount of copper is involved in these financing deals. Some analysts peg the metal involved in these financing deals to be close to 1 million metric tonnes. Copper imports from China have decreased because of the increased scrutiny by authorities.
This financing environment also impacted the investor sentiment, which led to a further decline in copper prices. Falling copper prices negatively affect producers like Freeport-McMoRan (FCX), Southern Copper Corp. (SCCO), Newmont Mining Corporation (NEM), and Barrick Gold Corporation (ABX). Barrick Gold forms 8.28% of the VanEck Vectors Gold Miners ETF (GDX).
Next, let’s analyze the outlook for the copper markets