Copper Withdrawal Orders From LME Soar To Record

While some (such as Bloomberg) see the unprecedented rise in orders to withdraw copper supplies from inventory at the LME as an indication of “improving demand,” we suspect the huge demand bias from Asia (read China) suggests more is at play here than ‘hope’ in economic surprises. While the reasons are still unclear, the timing of this spike in demand is very close to our recently discussed concerns over the collapse in the Chinese Copper Financing Deal (CFFD) rehypothecation-based funding system. The unlimited “collateral” capacity of the previously described funding chains means that there may simply not be enough copper in bonded warehouses to meet the Letter of Credit needs once the copper warrants start being demanded upon LC termination. So, perhaps, the surge in LME delivery requests reflects a desperate demand for physical copper to meet these unwinding funding deals’ needs. Either way, just as we saw gold vaults promptly emptied post the mid-April precious metals crash (especially that of JPMorgan), this sudden surge in physical demand bears very close watching.

Here is the chart of the record demand for copper from LME inventories…

And as a reminder (from our previous deep dive),


And remember that the final step of the CCFD debacle involves the overissuance of L/Cs related to any one specific bundle of copper, without limitation.

Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.

Hence this spike in demand in the LC (letter of credit provider) trying to meet the demand of real collateral (as if a fractional reserve banker suddenly had to meet all his account needs at once). This offers some explanation for the recent pop in copper prices but misses the critical next step.

Once that copper is delivered to the LC issuing bank, and the CCFDs are unwound (due to the state intervention that is expected) then the bank has no need to carry a high cost commodity and may deluge an already over-stocked market.


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