Santiago, Chile 05/04/2016 - The backwardation in the LME copper forward curve has started to ease in anticipation of more material arriving in listed warehouses, market participants said.
The cash/April date was last in a contango of $2 while the benchmark cash/threes was at a backwardation of $17, down from $30 last week.
Prior to the collapse in premiums and the closing of the arbitrage window, he copper market had been in a near-constant backwardation, which market participants attributed to a continued drawdown in LME inventories. Since the start of 2016, copper stocks have moved out of LME sheds and into warehouses in China.
Copper inventories on the LME are currently at the lowest since 2014 at 141,425 tonnes while SHFE stocks surged to all-time highs - investors took advantage of a favourable arbitrage between the two regions.
But this trend is starting to reverse. While LME stocks have yet to see any inflow, SHFE stocks have come off their highs - market participants said the metal is heading to the rest of Asia.
In fact, such is the lack of physical demand in China even as the backwardation eases that returning the metal to LME warehouses is still favoured.
"We are expecting to see more copper moving into LME sheds as the forward curve and low-premium environment will do this," a Cesco Week attendee told FastMarkets.
Spot premiums for copper fell further to $50-60 per tonne CIF China and in the bonded zone from $50-65 in the previous week and the lowest in nine months.
"Premiums have collapsed over the last few days and I have heard of offers that are below $50. Demand is really poor and so it is not surprising that metal owners are looking at alternative measures to make money," a physical trader said.
Making stock increase all the likelier are reports that warehouse incentives are being offered to attract metal.
“Previously, warehouse incentives for copper were hard to find but we are seeing this start to return and this is shifting the flow," the trader said.
And traders with large positions in the bonded zone are also looking at similar propositions - copper bonded stocks increased 24 percent to 450,000-470,000 tonnes at the end of February from 360,000-380,000 tonnes a month earlier. In fact, some estimate there could now be over 500,000 tonnes in the zone.
"What is demand driven and what is speculative is the big question but there are some big flows. However, half a million tonnes is not super high - I have known more," a copper executive said.
(Additional reporting by Ian Walker, editing by Mark Shaw)