Chinese cut spot aluminium purchases due to liquidity crunch

Buyers of copper and aluminium in China reduced spot purchases in the domestic and international markets this week after the country's equity market rout reduced the liquidity for the buying, people in the industry said.

Merchants and factories that buy the metals for manufacturing of semi-finished products such as copper rods and aluminium profiles appear to be holding less cash than they need for spot purchases, the people said. The decline in liquidity comes as equity prices fall, stock trading suspensions lock in investments, and loans linked to stocks fall in price.

"End-users have some liquidity problems, limiting their buying this week," said a trader at a state-owned refined copper producer, who was not authorised to speak with media and so declined to be identified.

"We don't expect end-users to buy extra copper in the near term because of the lack of liquidity, even if the copper price is low."

The equity rout pushed down copper and aluminium prices to multi-year lows this week.But the low prices failed to prompt merchants and end-users to buy more spot metals, traders said.

"Many individuals and companies have money trapped in equities so fewer people have been willing to take spot metals," said a sales manager at a Shanghai-trading firm.

Another factor for weak spot buying was that copper and aluminium smelters were not keen to sell spot metals at low prices, traders said. Supply in the domestic spot copper market has fallen since last month after four large copper smelters completed maintenance in May and June. Large aluminium smelters in China have limited sales of spot primary aluminium ingots since March to support domestic prices.

Firms have also found it more difficult to obtain letters of credit from banks for imports this week, said both the sale manager in Shanghai and a factory executive in the southern province of Guangdong.

"We asked a bank to open a LC this week and the banker told us to come back next month because they are busy dealing with stocks this month," the executive said, referring to a letter of credit to import primary aluminium ingot.