London 04/05/2016 - Chinese imported copper premiums are unlikely to rebound in the near term after hitting multi-year lows this week while copper stocks in Shanghai continue to rise and arb trading possibilities wane, sources said.
Spot copper cathode premiums are at $40-50 per tonne CIF Shanghai, the lowest in more than three years, according to FastMarkets' price assessment.
And this recent premium decline is indicative not only of downbeat fundamentals for physical copper in China but also a narrowing of options for Shanghai's arbitrage traders, sources said.
"The domestic market discount is still at 150 yuan; this shows there is currently no recovery from end-users in the Chinese market so I still hold a quite negative view," a trader in Asia noted.
One indication of a worsening near-term outlook was when copper producers and traders in China, the world's biggest consumer and importer of the metal, started to export material at the start of April to LME and non-LME warehouses in surrounding countries.
And this trend continues while the Chinese demand funk is showing no sign of abating. Since the start of April, LME stocks in Busan have risen to 14,850 tonnes from 3,875 tonnes while Kaohsiung stocks have jumped to 5,025 tonnes from just 225 tonnes.
Similarly, inventories in Shanghai bonded warehouses rose to 580,000-610,000 tonnes at the end of April from 530,000-550,000 tonnes in March.
End-users, the primary drivers of China's vast copper consumption, are simply not in the spot market for imported metal, sources said.
"When we talk to the end-users, they say their stock of final products is piling up so there's no fresh demand at the moment," a second trader said.
Higher LME prices - the metal broke over $5,000 per tonne during April - are also a hindrance, with China's industrial and commodities sectors already struggling to get liquid credit from banks.
"The real demand of the end-user is very stable this year but because they didn't have much money to build up stocks earlier in the year and because of their higher price now they have no capacity to build up stocks at this kind of price," a third trader said.
This is partly due to the shift to importing more concentrates for growing domestic production and less refined material.
At an industry conference earlier this year, analysts from Chinese broker JCC Jinrui Futures forecast a decline of 11.6 percent in imports of refined copper into China in 2016 to 3.25 million tonnes in 2016, citing slower demand growth and higher domestic output.
ARB TRADING SHRINKS
For some time, Chinese imports have been forecast to taper off but arbitrage trading of metals prices, interest rates and currencies kept demand for imported copper cathodes - among other refined metals - higher last year. But this is no longer the case.
The People's Bank of China (PBoC) said in January it would implement a reserve requirement ratio to banks trading the offshore yuan market, curbing those using high-value physical copper tonnages to profit-trade the then-volatile spread between China's onshore and offshore yuan.
This narrowed further the ways for traders to make profits from arbitrage trading in China. Since the Qingdao warehousing scandal of 2014-15, banks have taken fewer risks when granting letters of credit to trading houses, which were previously used in interest-rate-repo trades.
Some trading businesses that had sprang up over the past five years to trade arbitrages have since gone under or moved elsewhere, sources said.
"In the past too many financing deals were happening and a lot of new companies came into the industry to do this business," a trader in Shanghai said. "But now the market is back to normal these new companies have no business so either they transfer their business model or leave commodities altogether."
It is hard to pinpoint if and when a turnaround in Shanghai copper premiums could take place. To an extent, the market is in a state of flux - at some point the global market will have to shift from relying on China for refined consumption, perhaps by producing fewer cathodes and exporting more concentrates, for example.
A new reverse interest-rate arbitrage could open up should the US Federal Reserve raise rates, others suggested. But premiums should stand at low levels for now, market sources maintained.
"For the long term I'm still positive but short term I'm negative," the first trader said.
(Editing by Mark Shaw)