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Commodities

China risk unsettles cash-for-copper financing

Iron ore prices have plunged amid concerns over the Chinese economy.

TOKYO -- Anxiety over China's economy roiled markets Wednesday, sinking prices of copper and iron ore as well as Japanese stocks.

     In China, copper is used for more than making wires. The red metal is bought with dollars to post as collateral for borrowing, or to flip for yuan to invest in high-yield "wealth management products."

     But in the wake of last week's bond default by a Chinese solar panel maker, Chinese banks have begun tightening credit, raising fears of a contraction of the inflated demand for copper.

     Copper dipped into the $6,300 per ton range Wednesday on the London Metal Exchange, the lowest level in three years and eight months. The metal extended its declines as investors cut losses, threatening the value of copper collateral for Chinese loans.

     With China's economy sluggish, real demand for the metal also looks about to soften. Some 700,000 tons of copper is thought to be sitting in warehouses -- so much that some think China may turn around and export the stuff.

     Iron ore is employed in similar financing schemes and has taken a hammering, too. Global prices have plunged, with Australian ore trading near a 17-month low. In a sign of the hard times befalling China's steel industry, "small and midsize steelmakers are selling off iron ore in mid-procurement to raise cash," a trading company official said.

     Gold is absorbing some of the investment outflows from copper and iron ore. The traditional safe-haven asset is trading near a six-month high in the Tokyo market.

     Investors also pulled money out of Japanese equities Wednesday, sending the Nikkei average dropping 393 points to 14,830. Nonferrous metal suppliers and trading companies were among the big decliners as the index dipped below 15,000 for the first time in a week.

     "Given the small size of the Chinese default, the sell-off in Japanese equities went too far," said Nomura Securities' Masaaki Yamaguchi.

     With Japanese companies enjoying solid earnings, such declines could bring out bargain hunters. But investors also have other worries in emerging markets, notably the crisis in the Ukraine.

     "China's government is trying to take its time dealing with the shadow banking problem," said Mariko Noda at Mitsubishi UFJ Research and Consulting, adding that if change comes slowly, the Chinese economy could lose steam.

 

 

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