Singapore 22/06/2016 - Signs of tightening supply are emerging in the Chinese copper market while the extended closure of the import arbitrage window curtails imports, which is also encouraging exports.
China's imports of unwrought copper and copper alloy rose a strong 20.1 percent year-on-year in May to 380,000 tonnes, the latest Chinese customs data showed. But on a month-on-month basis, imports were down five percent.
"Imports basically reached a peak around March but the import arbitrage window has closed since and import activity has been slow," Qian Peng, a copper analyst at Shanghai Metals Market, said.
"We don’'t expect import activity to pick up in the near term and the import volume could continue to shrink gradually. Imports are unlikely to return to the March peak [of 530,000 tonnes]," he added.
The closed arb window has also resulted in falling copper stocks at Shanghai Futures Exchange warehouses. Excluding the May 2 week, they have dropped on a weekly basis since the week of March 21. Deliverable SHFE copper inventories have fallen 57.9 percent or 228,672 tonnes over the past 13 weeks to 166,105 tonnes as of June 17 - the lowest since early October last year.
Imports are also likely to remain capped while banks continue to tighten their lending criteria, sources said.
"Many of our clients who import need credit lines but they are unable to get letters of credit... banks do not want to give credit to small companies but they are the ones who need funds the most," a Shanghai-based trader said.
Although the domestic copper market is entering its off-peak season, the price - which typically falls during this period - is supported by a tighter market this year relative to last year, Beijing Antaike said in a report on Tuesday.
"The copper price is also seeing support from the closed import arb window, which is weighing on the market," the Chinese state-owned metals research firm said.
The most active SHFE copper contract price has been trading sideways since May. It has gained around three percent since hitting a three-week low of 34,850 yuan per tonne last Monday. The SHFE August copper contract closed at 36,260 yuan on Wednesday, up 690 yuan from Tuesday's close.
There is sufficient supply of Chinese copper blister in the market but this is being offset by a shortage of copper scrap, Minmetals Jingyi Futures said in a report earlier this week.
Chinese copper scrap imports slipped 4.4 percent year-on-year to 270,000 tonnes in May, which took year-to-date imports to 1.29 million tonnes. This is down 6.5 percent on the same period of last year.
In contrast, exports of unwrought copper and copper alloy surged 3.5-fold year-on-year to 84,984 tonnes in May. Year-to-date exports rose 48.3 percent to 163,197 tonnes and more outflows are expected in the near term.
Chinese copper smelters continue to deliver metal into London Metal Exchange-registered warehouses in Southeast Asia - a trend that started late in March - because of a combination of attractive warehouse incentives, lacklustre physical market and an open export arb window.
"We expect the high level of exports to continue in the near term. We spoke to some smelters and they said they intend to maintain stable exports," one Shanghai-based industry source said.
WILL TIGHTNESS LAST?
But whether the tightness will last is a point of contention. Some argue that it will not because the tightness is not driven by end-user demand while the import arb window could open soon.
Copper premiums in Shanghai have rebounded this week from multi-year lows to $45-55 per tonne on a cost, insurance and freight (CIF) basis and bonded, up $5 up from the previous range.
Premiums have edged up since the SHFE/LME arbitrage window opened briefly last week for the first time since before the Lunar New Year in February.
The Shanghai price closed between parity and a small premium to the LME (plus logistical premiums) early last week. And should the arb ratio continue higher, Chinese imports and demand are likely to increase, traders said.
But the arb has been closed since last Wednesday based on a CIF Shanghai premium of $50.
Falling Shanghai copper stocks and LME cancellations in Asian locations may point to a restocking phase but the closed Chinese import arb indicates a lack of strong physical demand, a London-based trader said.
While the pace of increase in Shanghai bonded copper stocks has slowed, the overall total remains high at around 610,000-640,000 tonnes at the end of May, sources said.
Others predict improved copper premiums in Shanghai from the end of June due to the shortage of cargoes arriving in Shanghai.
But with many market participants waiting on the sidelines to deliver from bonded warehouses, any import arb opportunity could be very temporary, the Shanghai trader said.
"Once the arb ratio opens, a lot of stock will go back to China. If the arb window opens for a few days, it will close very quickly and premiums will drop fast," he predicted.
(Additional reporting by FastMarkets' physicals team, editing by Mark Shaw)