The Bull 'n Bear on the Chinese Copper Trick
This week, I alluded to the unintended consequences of central planning in the Chinese electricity market. Today, the Wall Street Journal's Heard on the Street column (the best part of the newspaper) highlights a distortion in the copper market with its origins the Middle Kingdom. Apparently, Chinese companies take out letters of credit to buy copper in London and ship/ store it in China -- once they have sold it locally, the can use the proceeds until the letter of credit must be repaid (typically, in 3 months). Why do they do this? Because letters of credit are easier to obtain than bank loans due to the Chinese government's lending restrictions.
The article cites a precious metals analyst who estimates that half of the current copper inventories are tied to these operations. The problem is that this operation is becoming increasingly expensive/ risky, as copper in China now trades at a premium to that which can be bought in London. Companies must either accept to take a loss on the operation or hold the copper on the hope that the premium will reverse. If Chinese companies unwind this copper carrry trade on a massive scale, it would not do anything good for copper prices, which already look like they have topped out anyway.
On the LinkedIn IPO: If you are buying in at these prices, may God protect you because no earthly power can. At yeserday's closing price of $94.25, the shares were trading at 31 times trailing twelve months revenues; for reference, at the end of its first day of trading, Google was trading at less than 12 times revenues. The investors who paid $122 for LinkedIn share yesterday, or 40 times trailing revenues, are partying like it's 1999, but the hangover will be monumental.
Finally, check out an interesting article by Gillian Tett of the FT on the risks associated with the drop in the average maturity of outstanding Treasury debt.
Enjoy your day!