London 30/03/2016 - Chinese copper producers and some trading houses with large positions in the Shanghai bonded zone are eyeing delivering their material into LME warehouses in South East Asia, sources have told FastMarkets this week.
With the Chinese physical market considered particularly poor at present - demand has all but dried up in the face of a worsening physical arbitrage, high domestic stocks, tighter regulations for financing deals and a wider backwardation - producers are now looking at alternative methods in order to offload stocks.
FastMarkets understands that domestic producers are considering moving their material into LME warehouses in the region, particularly with some shed operators reportedly offering high incentives well above the Shanghai spot market.
Spot premiums for copper fell further in China to $50-60 per tonne on a cost, insurance and freight basis and in the bonded zone from $50-65 the previous week, the lowest in nine-months. Some offers have even been heard below $50.
"There's a lot of talk about it at the moment - I think if the Chinese market continues to be the way it is, then we could see material going into Korea, Malaysia and Singapore over the next couple of weeks," one trader in China said.
One producer source indicated that it has already begun making preparations to move some of its material into nearby LME sheds in Korea, should the market remain as it is in the coming weeks.
Furthermore, traders with large positions in the bonded zone are also looking at similar propositions - copper bonded stocks increased 24 percent to 450,000-470,000 tonnes at the end of February from 360,000-380,000 tonnes a month earlier. In fact, some estimate there could now be over 500,000 tonnes of material in the zone.
No major incoming stock movements have been reported so far in 2016 in the warehouses of Incheon and Gwangyang in Korea, Port Klang in Malaysia and Kaohsiung in Taiwan. But on Monday, 1000 tonnes arrived into Busan and a further 500 tonnes last Thursday, bringing stocks there to their highest since February at 4,875 tonnes.
Small increases have been reported in Singapore of 500 tonnes in early March and a mere 25 tonnes in February in Johor, but as yet, no other large shipments have gone on-warrant, despite the large backwardation currently plaguing the market.
Instead - predominently - metal continues to flow out of LME sheds. The LME cash-to-threes spread was last backwardated around $30, with stocks in LME warehouses dropping by the day - pushing the backwardation further out.
Traders have attributed the tightness to a continued decline in LME inventories - these were last at 143,075 tonnes, close to their lowest since August 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.
(Additional reporting by Kathleen Retourne, editing by Martin Hayes)