agreed, I was referring to metals specifically, mortimer.
Blackswan, congrats - I hope it continues!
apparently soros is betting on another collapse and buying gold today (or just betting interest rates will decrease). I wish I got on the gold bandwagon when it was 1/6 the price
Thats actually a pretty solid differentiation
Good insight BS.
How do you feel about copper and CCFDs?
What’s a cost curve?
Nvm, read the thread
can someone explain CCFDs in English please? My brain isn’t cooperating with below summary
An example of a typical, simplified, CCFD
In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.
A typical CCFD involves 4 parties and 4 steps:
Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D . The LC issuance is a key step that SAFE’s new policies target.
Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit.
The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them.
Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1.
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.
Copper ownership and hedging : Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).
Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.
How an unwind may impact each CCFD participant
As we discussed on pages 4 and 5, SAFE’s new regulations target both banks’ LC issuance (first measure) and ‘trade firms’ trade activities (second measure). Here we discuss how the different entities (A, B, C, D) would likely adjust their portfolios to meet the new regulations (i.e. what happens in a complete unwind scenario).
Party A: Party A, without the prospect of $10-20/t profit per Step 1-3 iteration, is likely to find it hard to justify having bonded copper sitting on its balance sheet (the current LME contango is not sufficient to offset the rent and interest costs). As a result, Party A’s physical bonded copper would likely become ‘available’, and Party A would likely unwind its LME short futures hedge.
Party B, C: To avoid being categorized as a B-list firm by SAFE, Party B and C may reduce their USD LC liabilities by: 1) selling liquid assets to fund the USD LC liabilities, and/or 2) borrowing USD offshore and rolling LC liabilities to offshore USD liabilities. The broad impact of this is to reduce outstanding LCs, and CCFDs will likely be affected by this. It is not yet clear what happens to the B-list firms in detail once they are categorized as such. However, if B-list firms were prohibited from rolling their LC liabilities this would increase the pace of the CCFDs unwind. In this scenario, these trade firms would have to sell their liquid assets (copper included) to fund their LC liabilities accumulated through previous CCFDs.
Party D: To meet SAFE’s regulations, Party D will likely adjust their portfolios by reducing LC issuance and/or increasing FX (mainly USD) net long positions, which would directly reduce the total scale of CCFDs and/or raise the LC financing cost, respectively.
^^I’m a little confused myself but I get the impression they are churning copper warrents on and off shore with intentions analogous to the carry trade. Good find… very interesting! However, this linked article is 3 years old. Are CCFD now a thing of the past. Looks like regulators caught up to it.
Ok, so I’m not 100% but this is my understanding of the CFFD (which China has been curbing for the past year or two). I’ll use the same letters and general steps as the zero hedge illustration. The essential point is to use a bonded commodity asset such as copper to mask a financing transaction as an import / export transaction and using warrents means the physical commodity does not have to be moved, it’s simply a frequently repeated paper transaction that is largely hedged. The benefit comes from a greater than 4% historical differential between offshore financing rates and CNY financing rates, with CNY being the higher rate. By creating this false import transaction, the buyer (B) is attempting to get CNY for use at a lower financing rate through shadow financing. The trade will only work while the interest rate differential holds (recent CNY stimulus has been eroding that). In addition, looser CNYUSD control by China has increased volatility and when combined with a weakening Yuan, this further hurts the carry trade. Against the ~4% differential, the firm has to net its own financing costs, the LOC costs, hedging costs and the discount given when selling the warrent back to (A) at the end (see steps).
So far, the firm trying to receive CNY financing (B) has gotten the copper at near zero trade credit rates (backed by LOC) and swapped (exported) it to an offshore subsidiary © for USD / CNH. But they need CNY.
When the LOC expires firm B returns the CNY to PBOC for the USD/CNH deposit and repays the financing to A. Then they repeat the financing transaction masked as an import / export roundtrip. This transaction puts downward pressure on CNY and fogs up the whole current account balance.
I don’t have anything useful to add, other than that it appears to have partly weighed on commodty prices over the past year although its a shadow market so everyone from zero hedge to Goldman is speculating on how large the market is, how much has been wound down by SAFE actions and how much remains as well as what steps can or won’t be taken by the Chinese. The effects beyond all these uncertainties are even less clear in how they’ll play out. So at this stage it’s something to monitor, but I’m not as terrified as zero hedge, instead saying that it’s a downward pressure but one that is managed and I still think fundamental demand is in the driver seat.
OK…so they’re hedging their copper exposure with short future contracts (while each “own” the copper), A is receiving a nice spread just for borrowing out their copper, B is receiving CNY/CNH ~4% - fees - A’s spread, C is part of B, and D probably receives commission each time the wheel turns (or atleast receives commission for the LOC every 6 months or so)
China’s export data is then fudged, including 20x more than actual notional every 6 months. Notional may even be 0 if copper never truly changes hands
Unwind:
A cancels their short future contract and potentially ACTUALLY sells its copper, B does not receive the currency spread onshore vs offshore cny/cnh leading to a wider gap between the two, C is same as B, and D no longer receives the LOC commission/less debt on its books?
There’s a few nitpicky things that probably come down to terminology, but in a broad sense that seems generally correct.
We were considering putting money into commodities (and mining specifically) over the last year but could never get agreement to pull the trigger. I work at a fairly conservative place and the volatility just puts people off. I was looking at various routes in that might be perceived as less risky such as investing through bonds rather than equity or in mining royalties. As I say, still haven’t found anything that works for us!
On investing versus gambling, you gotta go back to the CFA bible: https://www.amazon.com/Security-Analysis-Classic-Benjamin-Graham/dp/0070244960. One of the key sections in that is on investing versus speculating. It’s as relevant now as it was in 1929.
Security Analysis, or The Intelligent Investor - which one is the more practical book?
Probably both. I have the intelligent investor and it was good, but maybe I missed something because I didn’t think I really gained too much from it. It’s a lot of high level common sense stuff.
I’ve heard that security analysis is really good although I haven’t read it.
switching to oil and gas - does anyone know where the equipment would move if an oil rig closes down (in the US)?
Do these just sit and wear down at the rig location, or are foreigners usually interested in buying them?
I’m thinking at the price of 26/barrel, these rigs must have considered selling (or actually sold, went bankrupt,etc) and not just stopping production for a certain amount of time.
I don’t cover oil, someone else will have to weigh in. It might need its own thread.
I’ll ask the same for mining - when a mine closes in the USA, what usually happens to the mining equipment?
Does the producer usually go bankrupt so the assets are sold at auction?
I’m sure it depends highly on the metal being mined, but I’m curious how these things unwind
I’m sure it differs case by case.
I’m guessing an old mine would mostly have old equipment since they’d know in advance its going to be depleted. What is servicable would likely be sold or redeployed at a different site and the remainder would be scrapped for metal and parts.
Under bankruptcy it would largely be sold (maybe with the mine itself) unless they’re simply restructuring the debt.
here’s an option model (black scholes) to value natural resources…I’m going to tinker with it over the next few weeks: