London 29/06/2016 - Financial incentives to deliver copper into London Metal Exchange-registered warehouses in Southeast Asia are falling, sources told FastMarkets this week, in line with the cash/threes spread returning to contango.
Incentives are now at $45-55 for new enquiries - Kaohsiung, Singapore, Korean and Malaysian sheds had previously been offering as much as $65 for delivery onto the exchange.
The drop in spot incentives is in line with a slow but steady easing in nearby spreads, driven predominantly by consistent deliveries onto the exchange from trading houses and, crucially, Chinese producers.
At the end of the first week of June, there were 50,175 tonnes of copper in Singapore, 13,900 tonnes in Taiwan, 7,375 tonnes in Malaysia and 30,350 tonnes in South Korea for a total of 101,800 tonnes. This accounted for around 70 percent of global LME stocks following two huge deliveries of around 20,000 tonne into Singapore just a few days previously, up from just 28 percent at the start of the year.
Since these deliveries, copper flipped from a $28 backwardation at the end of May back to a small contango, relieving some of the pressure on those holding large volumes of metal.
The benchmark cash/3s is now in a contango of around $10 although the tightness of some of the nearby spreads are of concern for some market participants, particularly as much of the metal delivered over the last two months has been cancelled and stocks are starting to fall again.
Cash/July was last in a $5 contango, cash/August around $10 and cash/September at $11. The three months from August and September are in marginal backwardations of $1 and $3 respectively, however. Stocks have fallen to 93,500 tonnes in these Asian locations as of Tuesday this week.
Should stocks continue to fall and c/3s swing back to backwardation, warehouse incentives are likely to return to the end-May level of $65, some traders suggested.
With incentives at $45-55 in general, there is less incentive to move metal away from China since spot premiums in Shanghai were last at $45-55 on both a cost, insurance and freight (CIF) and a bonded basis.
When incentives were previously at their highest and the large backwardation on the LME was pressurising many who were holding stocks, the Shanghai premium was at its lowest since 2013 at $40-50 CIF and bonded.
Since news emerged that producers were eyeing LME sheds for delivery, around 20,000 tonnes of the deliveries have been from one producer, FastMarkets understands, with the rest probably from trading houses.
(Editing by Mark Shaw)