FOCUS - Chinese copper smelters continue to deliver onto LME in southeast Asia

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Ian Walkerian.walker@fastmarkets.comPhysicals Reporter+44 (0) 20 7337 2145

London 25/05/2016 - Chinese copper smelters continue to deliver metal into LME-listed warehouses in southeast Asia because of attractive warehouse incentives and while the physical market is lacklustre, sources said.

And further large tonnages both from producers and traders have been earmarked for delivery, they added.

Metal has been flowing out of key markets - in particular China - into the Asian LME system for the past two months. While this trend has slowed in recent weeks, domestic smelters and some large position holders intend to continue making deliveries, they said.

"Until the arb ratio or premium in Shanghai gets any better, we will continue to deliver onto the LME," a smelting source said. "The arb has been a little bit better in recent days but if it gets worse again, we'll deliver into Korea and Singapore."

Since FastMarkets first reported that holders of metal - including smelters - were targeting warehouses in southeast Asia for deliveries, a net 32,925 tonnes of copper has entered Taiwan, Singapore, Korean and Malaysian sheds. More than 50 percent of global LME inventories are now held in the region, up from 26 percent at the end of March.

Indeed, Asian LME sheds hold more copper stocks that any other location at around 85,000 tonnes followed by around 53,000 tonnes in the US and around 19,000 tonnes in Europe. But much of this metal is cancelled as soon as it arrives, particularly in Singapore.

Still, with the spot physical market in China still below $50 and close to FastMarkets' record lows, the backwardation on the LME benchmark cash-3s back out to $20 and the arbitrage window between the LME and the SHFE still firmly closed, there is no reason for those deliveries to cease, sources said.

There are also around 600,000 tonnes of cathodes in the country's bonded zone.

Smelters and large position holders in the bonded zone have also suggested they will continue to deliver while the Chinese spot market remains moribund and while LME-SHFE arbitrage opportunities are absent.

There are 13 Chinese brands approved for delivery against LME contracts, including those of Jiangxi Copper, Dongying, Daye, Jinchuan, Xiangguang and Zijin Copper.

Those who are taking advantage of the attractive warehouse incentives in Korean and Singaporean warehouses at around the $60 mark are, crucially, able to secure freight rates of as little as $1 per tonne in container shipping, multiple sources said.

With the logistics industry facing its own huge oversupply problem - worsened by multiple 18,000/19,000-TEU (twenty-foot equivalent unit) vessels coming online in the last couple of years - shipping liners are reluctant to take empty containers back to port in Korea. They are therefore offering extremely cheap rates between China and Korea.

Metal is moving in "dribs and drabs" as and when the holder is able to secure cheap rates rather than in huge shipments at any one time, a smelting source said

With some metal holders not needing to ship metal overland between its point of origin and Chinese ports due to their proximity to the Chinese coast, this presents a significant opportunity to holders, traders said.

Those delivering onto the LME will ultimately deliver the metal back to China should the physical market there recover above the incentives being offered in the region, one trading source in South East Asia believes.

"If they take in onshore, in Korea for example, they have to pay $40 per tonne in FOT charges plus a three-percent duty - so there's no way anyone will be doing that," the source said. "It'll go back to Shanghai eventually."


(Additional reporting by Kathleen Retourne, editing by Mark Shaw)



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