PHYSICALS WEEKLY - Shanghai copper premiums hit multi-yr low but rise in US

London 03/05/2016 - The physical base metal markets were quiet over the past week while most buyers have been content to sit on the sidelines until exchange prices correct lower.

Over the past month, there has been a striking disconnect between the futures and physical markets. CTAs and funds have poured money into commodities, which has pushed London Metal Exchange and Shanghai Futures Exchange (SHFE) to multi-month highs.

But physical spot demand has dried up - even in what traditionally is the busiest quarter of the year - which has led to depressed premiums for most metals and regions. The general consensus among metal buyers and sellers is that the global markets remain oversupplied, which makes a price correction inevitable.

This more bearish position is backed up by the uninspired Chinese PMI numbers released over the past couple of days. The April Caixin manufacturing PMI at 49.4 was below the forecast of 49.8 and March's reading of 49.7. The official manufacturing PMI was also weaker at 50.1 although it managed to hold above 50.

This prompted a sell-off in several LME metals on Tuesday. Three-month copper concluded at $4,921 per tonne, down $129 on Friday's close, while aluminium fell $45 to $1,634.

It will now be interesting to see if today's pullback in LME prices releases pent-up physical demand or if consumers are willing to wait for even lower prices.

COPPER PREMIUMS DIVE IN SHANGHAI, US FIRMS ON SCRAP SHORTAGE

• Copper cathode premiums sunk to their lowest since January 2013 in China while bonded stocks continue to rise and distressed sellers push the market there down further.
• Spot premiums for copper cathodes fell $5 to $40-50 per tonne on a cost, insurance and freight (CIF) basis to the port of Shanghai and clean bonded copper cathodes also slipped $5 to $45-55 in Shanghai, their lowest since mid-June last year.
• "Some traders want to get rid of their CIF cargoes and will sell at very low premiums" - trader in China.
• Market conditions have not changed greatly over the past week but are still dire in China, the world's biggest consumer of copper.
• According to conservative estimates, bonded copper cathode stocks have risen to 550,000-600,000 tonnes from 530,000-560,000 tonnes since FastMarkets' last assessment in March.
• Cathodes remain at a discount to Shanghai Futures Exchange prices in the Chinese market and the import arbitrage window remains firmly closed.
• "The domestic market discount is still at 150 yuan; this shows there is currently no recovery from end-users in the Chinese market so I still hold a quite negative view" - trader in Asia.
• In Europe, the market was quiet while the LME copper price is stable around $5,000. End-users are unlikely to stock up until there is a significant correction after copper's recent rally, sources said.
• Premiums remain at $95-105 per tonne on a delivered basis in Germany and are receiving support despite additional metal arriving from South America, having been rerouted away from weak Asian markets.
• "European producers of wire rods are seeing a huge increase in demand, which has helped reduce the oversupply of copper cathodes and is preventing a further drop in premiums" - trader in Europe.
• The US Midwest copper premium was an outlier this week - it climbed to 5.75-6.25 cents from 5.0-6.0 cents due to a recent bout of scrap tightness.
• "There is limited [scrap] inventory on the ground and one copper rod producer has been taking up 10-13 million pounds a month, which is a good bit of metal" - US trader.
• But spot demand for primary copper should be fairly minimal this week because many industry players are in Arizona for the American Copper Council's spring meeting.

ALUMINIUM PREMIUMS HOLD; PRICES, SPREADS REMAIN VOLATILE

• Aluminium premiums have been static during the past week - soaring LME prices deterred much buying.
• LME aluminium hit $1,686 per tonne on Thursday before consolidating on Friday and Tuesday - the market was closed on Monday for a national holiday.
• Consequently, formerly tight nearby spreads have relaxed, with cash-3 months now in a $16.5 contango, which should support premiums at this level, sources said.
• In-warehouse Rotterdam rates held at $75-90 per tonne for duty unpaid metal while levels were marginally lower for duty paid, slipping to at $130-140 from $130-145 last week in illiquid trading conditions.
• "Demand and supply in Europe are healthy, the only movements in premiums are due to the forwards - when they are tight like last week, premiums drop and when they are better like now premiums recover" - trader in Europe.
• In Asia, premiums were unchanged at $100-110 CIF Japan, Singapore, Malaysia and South Korea.
• The Japanese market is closed for Golden Week and corresponding national holidays. Japan is the world's second-largest importer of aluminium.
• "Nothing's essentially changed in the market - it's slightly oversupplied, there's a long queue but there is still a million tonnes outside LME warehouses" - second trader in Europe.
• The US Midwest premium remained in a tight range of 7.75-8.0 cents per pound, with several participants noting that the second quarter has been strangely quiet.
• "Our order book is still OK but people went into 2016 thinking it would be a real boom year but it's actually turning out to be a just a normal year. We're finding that some [of our consumers] overbought [on their long-term contracts]" - US-based trader.
• In soft US macroeconomic data, the ISM PMI fell to 50.8 in April from 51.8 in the prior month while Markit Economics' final PMI came in at 50.8, the lowest since September 2009.
• "The [weak] PMI numbers indicate that [the US manufacturing sector] hasn't come out of its funk. We're seeing very little activity and narrow ranges on premiums. There's a good chance that we limp into summer" - US trader.

ZINC RATES STABLE AMID LACK OF SPOT INTEREST

• Global zinc spot premiums stabilised amid lukewarm spot demand.
• In Shanghai, rates were last at $95-110 per tonne in bonded warehouse and CIF - there were a few deals concentrated around $100.
• The physical arbitrage window is still closed due to relatively strong LME zinc prices - imports would incur a loss of around 200-300 yuan ($30-46) per tonne.
• "It's totally a buyers' market that they are trying to pressure down on the premiums - you have a lot of supply from domestic smelters and they can be picky on brands and quality" - trader in Asia.
• "Some traders choose to declare customs even though the arbitrage was negative. The cost of storing metals in bonded zone is even higher if you consider the warehouse rents and deliver-in fees" - second source in Asia.
• In Southeast Asia, premiums were unchanged at $120-130 per tonne FCA for low-lead material in Singapore and Malaysia while rates in India held at $150-165.
• In Europe, premiums were last at $130-145 per tonne although some deals were heard at $125.
• Market participants noted a flow of Spanish-origin zinc into the European markets that might pressure premiums lower if consumer demand does not pick up.

LEAD UPCHARGE STABLE IN ASIA, DOWN IN US

• Spot lead premiums in Asia were unchanged but rates have dropped in the US due to cheap imports.
• Indian buyers are sitting on the sidelines while LME prices give no strong 'buy' or 'sell signals trigger either to buy or sell. Rates were at $80-95 per tonne CIF for 99.97-percent-purity lead
• "Indian markets are fairly quiet. They usually start to sell when LME lead prices are above $1,850 and commence buying when below $1,600. Now prices are in the middle so we have not seen any purchases from them" - trader in Asia.
• The US Midwest premium for 99.97-percent-purity lead fell to 6.5-7.5 cents per pound from 7-8 cents while 99.99-percent material dropped by a half-cent to 10.5-11.5 cents due to an uptick in cheaper imports.  

NICKEL PREMIUMS LOWER IN CHINA, RUSSIAN BRANDS STILL HARD TO GET

• Shanghai full-plate cathode premiums dropped to $130-160 per tonne CIF and in bonded-warehouse. Russian material was quoted at the lower end and Sumitomo and Jinchuan brands valued at the higher end.
• Market participants attributed the fall to a negative LME-SHFE arbitrage, incurring a loss of around 1,000 yuan per tonne on imports, and newly expanded warehouses in China already coming close to capacity.
• "Warehouses for nickel in China were nearly fully booked two weeks even after the country raised its storage capacity earlier this year" - local trader.
• Demand for briquettes and ferro-nickel from the stainless steel sector is still strong - mills in China are producing due to the higher steel price, with FeNi premiums quoted at $100-200 per tonne of nickel content.
• Warrant premiums for full plates in Singapore and Malaysia were steady at $50-65 in-warehouse despite a reported temporary lack of availability of Russian brands.
• "The Chinese are buying it although the arbitrage doesn't work - Chinese sold the metal forward and now need the material to delivery to cover their positions" - trader in Europe.
• The European market has picked up - premiums for briquettes rose to $40-60 from $30-60 last week and full-plate cathode held at a high $55-65 per tonne in-warehouse Rotterdam.
• "Lots of non-Russian materials are locked up in incentive programmes while it's hard to find Russian brands as they have been shipped to China" - local trader.

TIN RATES STABLE, CONSUMERS BUY HAND-TO-MOUTH

• The tin market has been quiet, with premiums for 99.9-percent and 99.85-percent-purity tin mostly unchanged in all locations.
• Premiums for 'three-nines' tin ingots in Singapore warehouses remain at $80-110 per tonne.
• "Most consumers are buying hand-to-month at the moment due to relatively high LME price and few are buying for restocking purposes" - trader in Europe.
• The market is focused on exports from Indonesia, which have resumed, with 7,190 tonnes sold on the Indonesia Commodity & Derivatives Exchange (ICDX) in April, up from 2,655 tonnes in March.

(Editing by Mark Shaw)