Hong Kong 14/06/2016 - Copper premiums in Shanghai will recover from the end of this month should the nearby spreads remain in contango while temporarily tight supply of cathode lends support, market sources said.
SHFE stocks continue to fall while the pace of increases in the Shanghai bonded zone has slowed due to less availability in the domestic market.
This follows recent deliveries of metal into LME-listed warehouses in nearby South Korea, Singapore and Taiwan. This trend could continue after traders diverted shipments last month when the backwardation in the LME's cash/threes spread weighed on their books.
"Premiums will definitely see some kind of recovery from the end of June because there will be a shortage of cargos arriving in Shanghai," a trader in Asia said on the sidelines of LME Week Asia here.
For example, a backwardation at $12 per tonne and financing and storage costs at around the same level ate into profit margins and triggered distressed selling, which pushed down premiums.
Last week, 61,750 tonnes of copper were delivered in LME sheds in Asian locations while cash/threes switched to a small contango last Tuesday from a backwardation of $28 at the end of May.
Deliveries onto the LME will continue because some traders have shipped metal under long-term contracts last month, which have not yet shown up in LME warehouses, while some Chinese smelters are unlikely to export more in the near future, with consistent falls in SHFE stocks keeping the Chinese market tight.
CIF Shanghai copper premiums have fallen to $40-50 per tonne from $90-100 since February due to unfavourable arbitrage opportunities between the London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) and a lack of financing demand, according to the historical data compiled by FastMarkets.
But the arbitrage ratio has improved in the past weeks - the window opened on June 13 for the first time since early February, according to FastMarkets calculation.
"We are not selling copper cathodes for grade A quality below $50 now with financing and storage costs around $12 per tonne and a contango partly offsetting the costs. We are able to hold onto material for better premiums in the short term," the trader said.
(Edited by Mark Shaw)