London 24/03/2016 - Sustained tightness in LME copper spreads is not enough to attract metal back into LME-listed warehouses, market participants told FastMarkets.
Copper's forward curve has spent much of the year in backwardation, with its benchmark cash/threes last at $20 back.
Traders have attributed the tightness to a continued decline in LME inventories - these were last at 151,375 tonnes, their lowest since October 2014.
Another factor in the enduring backwardation is the persistent large holder of warrants. There is one in the 50-79 percent bracket, according to the most recent LME data.
In a backwardated market, a trader can lend metal on the LME, selling at a higher price in cash and buying back for a forward date at a lower price. But while this has been clearly playing out for other metals such as aluminium, copper is an anomaly.
"[Spreads] have been consistently back but metal continues to leave," Societe Generale analyst Robin Bhar noted.
This could be because there is little material available outiside China, Vivienne Lloyd at Macquarie said.
In aluminium, large volumes are stored in non-LME warehouses. When tightness flares up, metal holders are able to deliver against it; once the backwardation eases, the material is simply taken off-warrant and moved to cheaper warehouses.
But off-exchange copper volumes are believed to be small, with metal largely heading towards China. SHFE inventories are at all-time highs at 394,777 tonnes and stocks in Shanghai's bonded zone area are around 500,000-550,000 tonnes.
Imports into China have surged - unwrought copper alloy imports jumped 57.43 percent in February from the same month of last year - because of arbitrage opportunities. The LME-SHFE window has now closed so imports in March are likely to be lower.
Still, the closure of the arb window is unlikely to result in material returning to the LME, market participants said - the backwardated spreads are not at a high enough level to cover the logistical costs of shipping metal.
"Those who have material in China will have paid duty and freight costs and would need a much higher backwardation than what we have now," a trader said.
The last time copper arrived in LME sheds in substantial volumes was in February 2015 when more than 30,000 tonnes were delivered in. At that point the backwardation was $80.
"The fact that there are no LME warehouses in China is why copper inventories are low. In a metal where there is no real surplus and the LME is drained, it shows where the action is. If the LME had warehouses in China there would not be a decline," a second trader said.
The LME has struggled to overcome regulation and establish listed warehouses in China but may have found a way to bridge the gap, announcing on Tuesday that it has entered a strategic alliance with Henry Bath, CMST Development and Mercuria Energy for its warehouse receipts programme, LMEshield.
Three-month copper was last at $4,886 per tonne, its the cheapest in a week.
(Editing by Mark Shaw)