PHYSICALS - Lower incentives in SE Asia removes support for Shanghai premiums

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

London 27/07/2016 - Lower incentives to deliver copper into LME-listed warehouses in Southeast Asia could remove some support for the Chinese premium, some traders argued this week.

Incentives - now reportedly as low as $30 in Busan, down 50 percent from when the benchmark LME cash/threes spread was at a backwardation of $30 last month - drew metal from multiple holders including large trading houses and Chinese smelters.

But lower incentives due the higher contango - last around $12 on cash/threes - are unlikely to entice metal out of the Chinese market in the same volumes of the past few months, traders said.

This could remove a crucial prop for the Shanghai copper premium, which is already close to record lows, traders told FastMarkets this week.

Premiums in Shanghai are stable for a sixth straight week at a low $45-55 per tonne on a cost, insurance and freight (CIF) and in-bonded warehouse basis over LME cash prices, albeit up slightly from $40-50 early in June and reports of deals as low as $20-30.

"This could be bad for the Chinese premium - incentives were acting as support for the Chinese market as it was taking material out of the sector, both long-term contracts and spot parcels," a Singaporean trader said.

"I think incentives are lower now. That might mean less metal moving into Korea and Singapore - that won't be good for the Chinese market where demand is already low," another said.

Since FastMarkets first reported on April 4 that Chinese producers and several trading houses were looking at warranting significant volumes of material, a net 124,900 tonnes have been delivered into warehouses in South Korea, Singapore, Malaysia and Taiwan as of July 6, much of which may well have originated from Shanghai's bonded zone.

Over that period, many with long-term contracts with South American and Indian producers have been redirecting cargoes directly to Southeast Asia instead of their usual ports of delivery in Shanghai, sources said.

And other than for two or three days, the arbitrage window between the London Metal Exchange and the Shanghai Futures Exchange (SHFE) remained firmly shut, as it has since Chinese New Year in February.

Given the negative arbitrage ratio, massive oversupply - there are around 600,000 tonnes in bonded warehouses alone - and an economic slowdown that is weighing on demand, holders of metal welcome any form of support for the premium.

But should domestic demand fail to pick up, incentives continue to fall and the arbitrage window remained closed, rates are vulnerable on the downside - particularly while liquidity is low.

Still, the spreads may tighten again if availability is squeezed if the large cancellations on warrants in Southeast Asia continue. If so, warehousers are likely to lift incentives to attract metal, traders said.

Some shipments - albeit not in the same volumes as some of the larger deliveries over the past month - are likely to continue, sources suggested.


(Editing by Mark Shaw)

 



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