PHYSICALS WEEKLY - Closed arb window sinks China copper premiums, Euro ali up

London 22/03/2016 - The physical metals markets again came under pressure this week amid continued lacklustre Chinese demand for metals.

A lack of east-west arbitrage opportunities across the base metals has meant premiums for copper, nickel and zinc have all struggled on the upside.

The arbitrage window between the London Metal Exchange and the Shanghai Futures Exchange was uniformly closed this week, meaning that Asia premiums lack upward momentum. Copper, nickel and zinc in particular have struggled in South East Asia and, in particular, in China.

"There are just more sellers than buyers - across all the metals," an Asian trader said. "It's difficult to find anyone that wants to buy - it's been a quiet week."

In Europe, aluminium made small gains, reflecting the nearby LME spreads settling back into a contango from a backwardation earlier in the month that had made financing unprofitable and pushed premiums down to their lowest in five months.

Demand for aluminium in the US remains strong but the flood of imports over the past several months has kept a lid on premiums there. In the other metals, US copper, zinc and nickel rates remain depressed - consumers are comfortably able to draw down their annual contracts.

ALUMINIUM PREMIUMS UP IN EUROPE, US RATES REMAIN AT 4-MONTH LOW

• Spot aluminium premiums edged up in Europe due to an improved contango in the nearby dates but US rates dropped, coming under pressure from oversupply.
• In Asia, initial deals for second-quarter ingot supply have been agreed at $115 per tonne for delivery to major Japanese ports (MJP) with one aluminium producer; other producers are still holding out for $125-130.
• In Europe, rates were last around $75-85 per tonne for duty-unpaid metal in Rotterdam, up from $70-80 last week, while duty-paid premiums increased to $130-140 from $125-135.
• Demand for spot tonnages remains light among consumers, who are generally well-covered on long-term contracts.
• "There is plenty of material available… but things are getting better" - consumer.
• The recent increase in premiums is seen lasting if spreads remain in contango, which could revive interest in financing deals - cash/threes was last at $21.25 contango.
• "In the long term, premiums still look fragile but the return of a contango has laid a good base for premiums" - European trader.
• The US Midwest premium held at a four-month low of 7.5-8.0 cents per pound - the region is still absorbing a recent influx of competitively priced imports.
• "Demand has never really been a problem for the US - it's always been a supply issue. Right now, we see plenty of metal in the Midwest. I would even argue that there has been some downward pressure on premiums this week" - US consumer.
• But the US is a natural deficit market - the country will consume more than 5.5 million tonnes of aluminium but will produce less than 1 million tonnes this year. This means that more metal will have to come from further away, which should limit the downside.
• "7.5 cents is the floor in the US as metal holders will be less inclined to sell a low numbers [given the easing in LME spreads]. But we haven't seen a bounce even though there's a contango market, falling stocks and rising cancellations. There's still quite a bit of supply that needs to be digested but I do see premiums moving higher soon" - US trader.
• Still, US market participants remain quite bullish on aluminium demand - many predicted solid consumption growth of 3-5 percent over the next several months.
• "Extrusion demand is good... P1020 demand is good because everyone is busy. Each month has been better than the last - March, April and May are all looking very solid. We see nothing that can hurt the demand curve" - US aluminium consumer.

COPPER RATES DROP TO 9-MTH LOW IN CHINA; STABLE IN EUROPE, US

• Spot premiums for copper fell further in China to $50-65 per tonne CIF and bonded from $65-75 last week, hitting nine-month lows.
• Several sources attributed the sharp drop to a combination of worsening physical arbitrage, high stocks in China, tighter regulations for financing deals and a wider backwardation.
• The LME cash-to-threes spread was last backwardated at $22, out from $16 last Tuesday, piling more selling pressure on metal holders.
• The arbitrage window between Shanghai and London remains closed - imports to the Chinese market would incur a loss of more than 1,000 yuan ($154) as of Tuesday, traders said.
• "We're unlikely to see an improvement on the arbitrage in the short term because high domestic inventories are keeping the pressure on the domestic copper price" - local trader.
• Stocks in Shanghai's bonded zone area are around 500,000-550,000 tonnes and there are 400,000-450,000 tonnes in SHFE sheds, according to various sources.
• Reduced demand for financing deals is also capping premiums - banks are becoming increasing reticent about issuing letters of credit to small and medium-sized enterprises.
• "The market is messy and we feel some panic" - source in Shanghai.
• In the rest of Asia, rates in South Korea, Japan and Taiwan all slipped to $65-75 per tonne CIF, in line with China, albeit in quiet trading conditions.
• No trades of grade-A copper were reported in South Korea although there was buying interest for off-grade - African brands traded around a discount of $10-15 - and for unregistered metal, with Chilean brands around $45-55.
• The European market has been largely quieter, with CIF Rotterdam rates stabilising at $50-55 this week.
• "On the supply side, it's not difficult for us to find material from producers… on the demand side, there's nothing exciting" - trader in Europe.
• The US copper premium held at 5.0-5.75 cents per pound delivered to the Midwest. Spot demand remains lacklustre because most consumers are well covered via affordable annual contracts.
• "I haven't gotten too many calls this week. There's still plenty of off-grade stuff [near the Mexican border] but more so people are just drawing down their long-term contracts. It's a terrible market for traders - there's just no place for us to get a bite" - US trader

NICKEL PREMIUMS CONTINUE TO SLIDE IN ASIA

• Nickel premiums continued to fall in Southeast Asia this week - continued strong supply met with a tepid demand-side response.
• In-warehouse premiums for nickel full-plate cathodes slipped to $15-30 per tonne in Singapore and Malaysia.
• While SHFE-deliverable Russian material still commands slightly higher numbers, there is little of it available, sources said.
• Similarly, nickel briquettes are also available on the cheap, slipping to at flat to $10 in Singapore from $5-15 last week.
• The slump reflects the renewal of warehouse rents at the end of the month as well as a closed import arbitrage window into China.
• Trade into China has been almost non-existent over the past two weeks but premiums are slipping because of lower offers from sellers - they now stand at $130-150 per tonne CIF Shanghai.
• European premiums have stabilised at $50-60 per tonne for full plates and at $30-60 per tonne for briquettes in-warehouse Rotterdam.
• Also, melting-grade cathodes are still trading at 12-16 cents per pound on a delivered basis to the US Midwest region.

TIN UPCHARGES START TO GAIN ON TIGHTER SUPPLY

• Premiums for tin firmed marginally in Singapore on tighter supply from Indonesia.
• Tin ingots of 99.9 percent purity climbed $10 per tonne to $90-120, while low-lead material is now at a range of $210-260.
• Indonesian tin exports in February were down 25 percent year on year at 4,505 tonnes, government data showed, compounding the 63-percent year-on-year drop in January.
• Output at nine of the world's 10 leading tin producers fell in 2015, with many enacting cuts because of lower prices, ITRI reported last week 
• Elsewhere, in-warehouse premiums were stable in Rotterdam at $350-400 per tonne for three-nines metal.
• "As time goes along you will see the physical market a little bit tighter" - trader in Europe.

ZINC PREMIUMS REMAIN HIGHER, TRADERS REPORT GOOD ENQUIRIES

• Special high-grade zinc ingots in Southeast Asia were still fetching relatively higher premiums this week in the wake of supply issues at Hindustan's Rampura Agucha zinc mine that briefly interrupted its concentrate production, the company said.
• Spot premiums for zinc in countries such as Vietnam and Indonesia remained higher at $145-165 per tonne on an in-warehouse basis - traders have generally reported an increase in enquiries throughout March. 
• "[Rates] remain $10-15 higher in general because of the supply issues… hopefully this continues into the second quarter" - trader.
• Low-lead zinc premiums held at $95-110 per tonne in Singapore and Malaysia.
• In China, traders again remarked on the lack of interest in importing zinc, particularly with the arbitrage between the LME and SHFE firmly closed.
• "There's absolutely no reason to import at the moment; you're losing four to five percent" - second trader.
• Still, material is thought to be held in bonded warehouses in anticipation of an opening of the window. Shanghai premiums were last assessed by FastMarkets at $100-115 on a CIF and bonded basis.
• European premiums are also stable at $125-145 per tonne although some market participants have recorded some slightly higher deals in line with a general uplift in premiums stemming from various production issues.
• US premiums for special high-grade zinc were steady at 6.0-6.75 cents per pound amid significant inventories in New Orleans and only middling spot demand.

LEAD UNCHANGED AMID AMPLE SUPPLY, HIGHER PRICES

• The spot market for lead ingots was once again stable - ample supply and a relatively higher price have deterred buyers, market participants said.
• "The higher price means there's more scrap available" - trader.
• Premiums for spot lead warrants in northern European ports remain at $10-20 per tonne, with Italy and Spain slightly higher at $15-20.
• Spot premiums for 99.97 lead ingots are steady at $80-100 CIF India.

(Editing by Mark Shaw)