China Copper Trading loses its charm

On March 24, a sudden drop in the Chinese yuan exposed how sensitive copper prices are to shifts in China's financial landscape. This unexpected move has shaken market confidence and raised questions about the future of copper trading in the region.

Since the start of the year, the yuan has lost 2.8% against the U.S. dollar—a trend that has caught many by surprise. For over a decade, a rising yuan was considered one of the safest bets in global markets. Meanwhile, Shanghai copper has tumbled 14.7% year-to-date. In February, China’s copper imports dropped by 26% compared to the previous month, signaling a major shift in demand.

The link between the yuan's depreciation and falling copper prices lies in the way copper is used as a trading tool. Many traders buy copper overseas at low prices in U.S. dollars, import it into China, and use it as collateral for loans. These funds are then invested in high-yield products. When those investments mature, traders can repay the original loan and pocket the difference.

However, this strategy became less appealing when the yuan unexpectedly weakened in February and March. The model of using dollar-denominated loans to generate profits began to unravel. As a result, copper imports declined sharply, leading to an oversupply of copper on the market. This surplus caused a steep drop in prices, and the premium of Shanghai copper over global benchmarks narrowed significantly.

Another factor behind the decline in copper prices is the slowdown in China’s economic growth. February’s weak export figures and slower industrial output have led to revised economic forecasts. A mid-March survey suggested that China’s GDP growth for 2014 might fall to 7.4%, down from the earlier projection of 7.5%.

While the slowdown in China’s economy is a long-term trend, it is the rapid changes in the yuan’s value—driven by speculative activities—that have created unexpected volatility in copper demand. As investors reassess their strategies, the future of copper trading in China remains uncertain.