With so much attention devoted to Chinese economic growth, and its attendant need for natural resources, investors can be forgiven for having entertained straightforward assumptions about the relationship between China and copper prices being essentially a matter of supply and demand.
Ever since the nation’s first bond default last month, however, more attention is being paid to how as much as 60 percent of China’s copper stock is used as collateral in financing transactions. The financialization of copper has as much, if not more, to do with the hammering that copper prices have taken in recent times than does a slowdown in that country’s economic growth, especially as the government attempts to curb the dollar/yuan carry trade.
Which brings us to Wednesday. By midday trading, shares for Chinese copper producer Lihua International (LIWA) had lost over 50 percent of their value, and on nearly 50 times the stock’s average trading volume.
The precipitous decline appears to be the result of the announcement that the Rosen law firm of Manhattan was investigating potential securities fraud claims against the company. The investigation is purportedly the result of Chinese media reports from last week finally making their way to the US.
Last March, Lihua CEO Jianhua Zhu held its quarterly earnings call during which, through a translator, he explained some production delays as temporary but prudent, as they would lay “the foundation for future growth.” He also provided 2014 guidance, putting revenue and and net income growth in a range between about 3 and 5 percent each.
Indeed, the call seemed to be going well until JHS Capital analyst Brian Brennan began asking question about a lack of communication between the company and its mostly US-based shareholders. Specifically, he was referring to two situations, including the shutdown of a copper rod manufacturing facility back in December that caused production delays, and that shareholders were never told about.
In Wednesday’s press release, the Rosen firm cited that not only had the company ceased most production back in January, but that Chinese authorities had in fact seized the company’s warehouse and begun investigating its CEO.
Ahead of Wednesday’s closing bell, shares for Lihua were down 52 percent to $2.08 per share. The company addressed the matter briefly in a midday press release, in which it said:
“The Board of Directors of Lihua International…is aware of a decline in the Company's stock price and published allegations that Mr. Zhu Jianhua, the Company's CEO and Chairman of the Company's Board, may have diverted or attempted to divert Company assets and as a result may have been the subject of action by local law enforcement. Although they have not yet been able to verify this information, the Board's Audit Committee is taking steps to determine the facts and will take appropriate action. If the allegations prove true, the Company's financial statements may contain material misstatements.
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