Global Markets Overview – 3/12/14
By Evan Lucas, IG Markets Strategist | March 12, 2014 10:00 AM EST
Copper drops like a stone
Copper prices have outperformed the overall metals market as traders have closed short selling in expectation of government intervention to boost growth, but the metal may still be "slightly overvalued," according to a Monday report by Barclays.
The latter is now a real concern; overnight CME copper futures for May dropped 2.7% to $2.950 a pound, after having seen an intraday low of $2.942 - the lowest read for an active contract since June 2010. Copper is already down 13% year-to-date, but the demand for the industrial metal is being questioned further as China sees exports and inflation contracting at faster rates than expected.
There are a lot of questions around China's situation right now; is industrial and consumer demand fading? Are we about to see further defaults across the financial spectrum? Is the credit crunch about to resurface?
All of these macro issues are feeding into China hysteria. What is compounding the situation is the emergence of how much copper and ore is being used as collateral.
In recent days a lot is being made of how the Chinese have used collateral to finance projects. There are some that estimate that between 60% and 80% of China's copper imports over the past three years has been used as collateral.
This is an amazing estimate; it would change the perception of 'Dr. Copper' as a gauge of the Chinese economy, as it's not being used for industrial production, but rather as a financing tool for whatever reason. It has also emerged that iron ore is being used in a similar vein with estimates suggesting one third of the 108 million tonnes of ore at Chinese ports is under financing.
The concern now is with so much cargo under financing, and with prices falling, collateral value will raise the prospect of margin calls and therefore defaults. Now in most cases you would expect hedging; however in the case of iron ore this hasn't happen and having seen demand in the fourth quarter of 2013 spike, the average price of iron ore at this time was US$130 to US$135 a tonne which would suggest losses are at 20% or more.
Defaults are a worrying development as dumping is a real possibility, which will see a spike in supply at fire sale prices. What is likely is that we will see a combination of liquidation and defaults. The latter (as strange as it is) would be more beneficial to supply as the banks would take ownership of the collateral, but they are unlikely to sell off the commodities until prices stabilise.
Ahead of the Australian open
We are currently calling the market down 16 points on the 10am bell (AEDT) to 5397. The copper plays are going to be the ones to watch due to the rout seen overnight; the likes of Oz Minerals, PanAust and even Sandfire Resources are likely to see pressure selling. What may see some stabilisation after two days of sell-offs are iron ore plays, after having seen the iron ore price stabilising overnight.
[Kick off your trading day with our newsletter]
More from IBT Markets:
Follow us on Facebook
Follow us on Twitter
Subscribe to get this delivered to your inbox daily
Most Popular Slideshows
- Taylor Swift Named Forbes' Second Highest Paid Country Musician [PHOTOS]
- Forever Lost: Indescribable Anguish for Malaysia Airlines MH17 Families, Remains of Some Victims May Never Be Found (PHOTOS)
- Global Aviation Accidents: UN to Form Safety Task Force, Gov'ts Should Share Intelligence Info to Avert Future Incidents on Flying Over Warzones (PHOTOS)
- Lunch with the Gods: Pope Francis Eats with Vatican Workers in Cafeteria
Join the Conversation
- South Australia OKs $800M Copper, Gold & Iron Ore Mine on Prime Agri Land in Yorke Peninsula
- Australian Stock Market Report –Midday July 30, 2014
- Shanghai Stock Exchange Will Not Extend Trading Hours
- Long Beach Real Estate Market Is Pricing Out Home Buyers with Limited Budget
- Australian Stock Market Report –Afternoon July 30, 2014
- Samsung Galaxy S5 Alpha Leaks Online: Release Date, Five Features to Wait for New Smart Phone
- Photos of Motorola Moto X+1 Prototype and Specs Leak Online, Release Date, Four Fresh Features Revealed
- Sony Xperia Z3: Release Date, Five Features to Expect from New Android Smart Phone
- 5 Food Scandals That Shocked The World
- Iran Leader Asks Muslims to Supply Arms to Palestine, Calls Israel ‘Rapacious Wolf’
- Nexus 6 Likely Confirmed as Motorola 5.9-Inch Phablet on Release Date – Report
- MH17: Shrapnel Hits Plane, Russia Calls for UN-led Investigation