London 13/04/2016 - Chinese copper smelters and large position holders in Shanghai's bonded warehouses have been consistently delivering metal into London Metal Exchange-registered warehouses in southeast Asia, as predicted when FastMarkets first reported the plans on March 30.
In the two weeks since then, 17,825 tonnes of copper cathodes have been delivered into LME sheds in Taiwan, South Korea, Malaysia and - most significantly - Singapore.
With warehouses reportedly offering incentives of around $60 on some brands to attract metal, 12,275 tonnes of copper have been delivered into Singapore over the past fortnight. Some 15 percent of total LME stocks of copper are now held there, up from seven percent at the end of March.
In Korea, after 2,700 tonnes were delivered into Busan and 2,050 into Gwangyang, around seven percent of LME stocks are now in country, up from two percent at the beginning of the month.
Smaller deliveries of 500 tonnes and 300 tonnes have gone into Taiwanese and Malaysian sheds respectively although high incentives are also reportedly being offered at these locations.
The source of all this metal is, according to sources, predominantly Chinese copper smelters who are looking at other means to offload stocks while the Chinese physical copper demand is underperforming.
Spot copper premiums are at $50-60 per tonne on a cost, insurance and freight basis, up slightly from last week's nine-month lows of $40-50 but still far below the incentives being offered in Southeast Asia by some warehousers.
"If the incentives continue and the backwardation [on the LME] expands, [deliveries] will continue," a Chinese trader said. "As long as the Shanghai market doesn't improve to $80/90, they will carry on."
But while deliveries are likely to continue while shipments booked at the start of the month filter into the system, an improvement in the Shanghai spot market and the current arbitrage ratio put on hold any plans to move stocks, others said.
"Total exports from Chinese smelters might be close to 30,000 tonnes… to LME warehouse sheds but these will take time to show up in the LME stock system as some of the shipments have not arrived. But the current arbitrage ratio is not supporting exports so I would expect no further deliveries," a smelter source said.
Crucially, warehouses in Southeast Asia are incentivising imports while the backwardation on the benchmark cash-3s spread on the LME is around $25.
But this backwardation has shown no signs of easing despite almost 18,000 tonnes of copper deliveries, one trader pointed out
"Ultimately, what's changed? Spreads are not really any better," he said. "The price isn't really that much different - it's too small of an amount. It makes you think how much would be needed to make an effect - stocks are ultimately unchanged. It actually doesn't really balance out with what's leaving LME sheds."
There is one dominant position holder of 30-39 percent of warrants, down significantly from 50-79 percent towards the end of March. Still, the backwardation remains around the level it was at when the larger position holder was in the market.
LME stocks recently hit their lowest since August 2014 at 141,075 tonnes. Conversely, copper inventories in Shanghai's bonded zone have continued to climb, rising 17 percent month-on-month to a nine-month high of 530,000-550,000 tonnes at the end of March.
Copper stocks at Shanghai Futures Exchange warehouses dipped 7,800 tonnes or 2.1 percent week-on-week to 360,925 tonnes as of April 8 - the third consecutive week of decline. Total copper stocks have fallen 8.6 percent or 33,852 tonnes in the three weeks prior to April 8 although the current inventory level remains close to a historical high.
(Additional reporting by Vicky Chen and Vivian Teo, editing by Mark Shaw)