Copper Bears Roar!

| March 10, 2014 | 0 Comments

copperCopper took a big hit on Friday.  The industrial metal fell a hefty 4.2% on news of a small Chinese solar company failing to pay interest on its bonds.   Friday’s drop puts copper at $3.08 a pound, a stone’s throw away from the 52-week low set in August 2013.

Take a look…


Given the intense bearish reaction to the news, it’s highly likely copper continues lower to test technical support at $3.05 this week.

Now, you may be wondering…

Why would copper investors care about a pipsqueak Chinese solar company defaulting on its debt?”

Let me explain…

The default, by Shanghai Chaori Solar, is the first domestic bond default in modern Chinese history.  In the past, the country’s socialist government bailed out ailing companies by refinancing and paying their debts.  In a nutshell, the Chinese government simply wouldn’t allow companies to default.

But with Chaori’s default, that practice appears to be coming to an end.

And with it comes the possibility of many more corporate defaults… 

In fact, analysts say the number of Chinese companies with debt-to-equity ratios of 200% or higher has jumped nearly 60% since 2007.  And according to analysis by Bloomberg, 63 companies have debt-to-equity ratios of 400% or higher.  All said, China’s corporate debt market has reached a staggering $2 trillion.

In a worst-case scenario, a rash of defaults could lead to a banking crisis much like the one seen in the US a little over five years ago.  Obviously, such a situation would decimate growth, throwing China’s economy into a tailspin.

It’s not a pleasant thought…

And remember, China is the world’s largest consumer of copper.  So demand for the metal would plummet in such a situationThat’s precisely why traders were so quick to react to the news on Friday.

What does all this information mean for the price of copper going forward?

While it’s impossible to know exactly when the next default will occur, copper investors will likely be unwilling to put a substantial bid into the market because of it.

As a result, copper will likely underperform for some time to come.

How can you capitalize on the situation?

I’m releasing a new trade this afternoon in my new options trading service, the Options Profit Pipeline.  This highly unique service focuses on trading options in commodity ETFs and resource-based companies.  I’ve found a company with substantial downside potential thanks to fear overtaking the copper market.

If you’d like to join us, click here.   

Until Next Time,

Justin Bennett

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Category: Copper

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.