First it was Chinese cotton farmers hoarding cotton in their kitchens.  Now it’s Chinese trading firms using copper as collateral for financing business deals.  This latest note from Standard Chartered (courtesy of FT Alphaville) just wreaks of bubbly commodity madness:

Warehouse sources report substantial volumes of copper inflows after the Chinese New Year holiday. A very small proportion of this copper has been sold to the domestic market so far. Chart 4 shows that Shanghai copper has been trading at a significant discount to LME copper since October 2010, reflecting pressure from increasing stock levels.

With more material available, trading firms have been diverting metal into finance deals and using copper as collateral. Copper tied to these deals will be released to consumers, but only when demand picks up more decisively. We estimate that roughly 550kt of copper was stockpiled in bonded warehouses in Shanghai in late February, the majority of which is tied to financing deals.

The Americans started the financialization of everything, but the Chinese appear to be attempting to perfect it….In the end, their speculative mania is certain to end the same way all American bubbles have ended….The Chinese have adopted many facets of capitalism from their Western economic textbooks.  Unfortunately, they’ve adopted many of the very worst parts….


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. you have no idea. in some countries, people are hoarding rice, sugar and cooking oil….you name it.

  2. when this equity/commodity bubble pops, food/building materials/goldnsilver will split in the commodities sector.

  3. Back of the envelope calculation:

    550kt * $4.50/# = almost $5B of collateral “guaranteed” to hold its value = OUCH!!!

  4. I think the correct statement is the chinese gov is taking all the worse aspects of western monetary and regulatory policy. The speculation is just a natural reaction to rigged interest rate spreads and negative real rates, and biz/party elites vs. the middle class.

    BTW TPC what’s your thoughts on global private hoarding? My gut feeling is hedge funds may have been building private storage that goes unreported .. of course, now the trend is physical ETFs, so it’s going public now. From back of envelope on cost-to-build industrial RE, the cost of commodites vs. storage has been steadily trending upward which feeds on more physical speculation.

  5. Bear droppings:

    Problems brewing in China? …

    * Finisar Corp…. warned of a litany of factors that are hurting its business, particularly slowing demand in China. The commentary alarmed investors because it suggests that China’s aggressive rollout of new telecommunications networks is slowing. That deeply damaged other, related stocks. Finisar executives said what it is seeing is an industrywide problem.
    * The penalty for Finisar’s worse-than-expected outlook was so severe, in part, because its explanation for what went wrong was so pointed. Growth markets, particularly China, have been crucial for many technology companies as the Great Recession has taken its toll on spending in the U.S. and Europe. Any serious problems in those markets have ramifications across many industries.
    * Building out telecommunications networks costs billions of dollars, and the industry’s spending tends to come in waves. Finisar’s guidance shocked investors because it suggested that the industry could be in for a prolonged slowdown. (still too early to say that, but it could be a shot across the bow if anyone else in the industry confirms FNSR’s issues) Finisar executives said on a conference call with analysts that the slowdown is part of an “industrywide phenomenon.”
    * They said they’ve seen the dramatic reduction in orders in China for a couple of months and weren’t sure when it would ease. They emphasized that the weakness was with multiple customers in China, and that Finisar isn’t losing market share.
    * Other factors the company identified in its guidance were price cuts for customers, a 10-day long shutdown at some customers for the Chinese New Year last month, and the fact some telecommunications customers are reducing how much gear they buy and keep in their inventories.

    About 6 minutes in, higher food prices are apparently the solution to our economic woes. Not so good for the poor, perhaps …

    And just in case anyone’s interested and hasn’t seen it yet …

    MacroMavens’ Stephanie Pomboy doesn’t believe the recovery is good for the long haul, and she’s recommending Treasuries and gold.

  6. Commodities in a bubble?
    Corn stocks to use ratio lowest in decades. Ditto cotton. Etc.
    For the most part, the commodities that are high priced (not exactly parabolic yet except maybe for cotton) are the ones supported by extremely friendly fundamentals. Those that aren’t (natural gas)are low in price. It’s true the funds are long corn, they ought to be. They are heavily short natural gas, which is also the correct position. If you have some cotton to sell, by all means, please do.

  7. What should they use as collateral, treasuries? hahahaha. Even PIMPCO gave up that charade, as I figure they thought no matter how loudly they barked, no way in the next year are interest rates raised.

    The blossoming of alternative currency systems should ring alarm bells everywhere for the greenback.

  8. And btw, they better be hoarding copper. Do you know what the annual consumption of copper is in China??? It’s outrageous. At this pace, they ALONE will consume/import the entire world production of copper in 5-7 years.

  9. Greenback? What about our newly introduced global reserve currency, a piece of paper with head of Chairman Mao?

  10. Give me a break. You really think some dirt poor farmers in China hoarding 5 bales of cotton in their shack is enough to move the market? This site is usually quite pragmatic, but really? I honestly think something else has to be going on.

  11. bubbles…i love them –they’re so easy to take the bulls money with….it spends real good too.