London 13/06/2016 - The recent surge in copper stocks in LME-bonded warehouses across East Asia stems from a combination of three factors, Barclays said.
LME inventories soared this month, climbing 37 percent in one week and 40.5 percent month-on-month. Although they fell 3,050 tonnes to 207,625 tonnes, according to today's LME data, they are up from 156,675 tonnes a month ago.
Singaporean warehouse inventories have risen 20,000 tonnes to 62,000 tonnes, South Korea 20,000 tonnes to 44,000 tonnes and Taiwan 3,500 tonnes to 14,000 tonnes since the start of June.
The spike in LME inventories is partly attributable to the low physical premium on copper cathode in China, the bank said in a research note
Premiums for cathodes in Shanghai's bonded zone for nearby cost, insurance and freight (CIF) delivery have tumbled since late March - they have languished at $40-50 per tonne over the past two weeks.
This reflects a confluence of China factors, including widespread availability of domestic copper supply, moderating demand and sagging financing interest, Barclays said.
Premiums of $50-65 per tonne offered by warehouses in Singapore, Johor, Taiwan and South Korea have also helped attract the metal to LME sheds, it added.
Chinese copper smelters and large position holders in Shanghai's bonded warehouses have been consistently delivering metal to LME sheds in southeast Asia, with warehouses offering incentives of around $60 on some brands.
"We have heard three theories for the actual source of the metal that has surged into LME warehouses," it said.
Some traders have speculated that the supply is not new but merely the result of a trading house unlocking large volumes of already present but off-records supply to short the market and swing the cash/three-month spread to contango, it noted
Cash/threes narrowed to just $1 backwardation last Tuesday from $26 in the previous week - it was last at $15 contango.
The second explanation is that the additional supply was the result of a large shipment of South American production, originally intended for China but rerouted to the LME system because of favourable incentives, it added.
A third theory is that China copper producers, faced with tepid domestic demand, are offloading excess supply onto the LME and using access to VAT rebates to overcome that hurdle on exports, the bank said.
While LME inventories have surged, SHFE inventories have dropped, falling 28,700 tonnes last week - a 13.6-percent week-on-week decline.
But bonded stock inventories in China have not budged at 625,000 tonnes, which brings total China inventories to 807,000 tonnes, it said.
If total China inventories - not just SHFE stockpiles - remain high while LME inventories surge, the result for the copper market over the medium term would be bearish, Barclays concluded.
(Editing by Mark Shaw)