Slumping Copper Prices and the Impact on Lending

Over the last few weeks, Copper has seen market prices decline to multi-year lows.  Current prices have dipped as low as $2.92 per pound down from a peak back in January of $3.37, equating to a 13.3% drop.

The drop has been driven by continued global economic weakness and uncertainty coupled with some unique circumstances within China which consumes 40% of the world’s annual copper production.  Within China, copper is utilized in financing transactions where companies receive loans in exchange for the commodity as collateral.  These borrowers then use the loans received at low interest rates to invest in assets with higher potential yields.  With falling prices, lenders require more collateral from borrowers who will now be forced to sell copper into the market at the same depressed prices.  Also, lenders start dumping metal into the market to recover their loans.  There are large concerns in the market place that this will result in a glut of supply that will further depress prices as it is estimated that approximately one third of all copper imported by China is used for these types of financial transactions.   Given the potential supplies that could enter the market, some analysts project the potential for prices to dip closer to $2.00 per pound.

For domestic lending facilities that are heavily collateralized by copper, it will be important for lenders to monitor this situation closely and either ensure their borrowers are appropriately marking their inventory to market on a regular basis or that they are adjusting their advance rates accordingly.

For more information contact:

Ed Zimmerlin
Senior Vice President
Hilco Valuation Services
(847) 313-4720