China default special II: Commodity ripples

The Friday default of a tiny corporate bond in China appears to have triggered larger ripples for commodity markets. From the FT:

Copper for delivery in three months on the London Metal Exchange fell by as much as 3.7 per cent to $6,785 a tonne. Other base metals were also under pressure. Three-month nickel, which hit a nine-month high earlier in the week, dropped 1.5 per cent to $15,242 a tonne, while zinc lost 2.5 per cent to $2,056 a tonne and aluminium fell 1.7 per cent to $1,765.

“China’s authorities could decide to let some of these trusts default, which may destabilise the shadow banking sector. In the worst case, this could lead to a credit crunch, further damping China’s commercial copper demand and that may not be offset by a potential rise of copper shipments for financing purposes,” Michael Widmer, metals strategist at Bank of America Merrill Lynch, wrote in a report this week.

Here is the chart:

At 3.09 $US per pound, copper is sitting right on a three year support level in an ugly descending triangle pattern that looks like breaking.

The jury is out on whether this is fears about economic growth or a seizure in the copper financing arbitrage complex. It’s probably both.