London 15/08/2016 - More copper cathodes are expected to be delivered into LME warehouse sheds in Asian locations from late-August and September onwards, sources close to the matter said.
At least 30,000-40,000 tonnes of copper cathodes could flow into locations such as South Korea, Singapore, Malaysia and Taiwan, according to FastMarkets’ estimates from the plans of various sources.
One Chinese smelter intends to export at least 5,000 tonnes in August but the specific dates to put the metal on warrants have not been finalised.
“It will depend on the spreads and other factors which are still under discussion,” a source from the smelter said. “But the main reason for us to export is because of the poor premiums in China. It’s better off if we export.”
On Monday, there was a delivery of 8,300 tonnes of copper into LME warehouses and 3,525 tonnes of outflows, resulting in a net increase of 4,775 tonnes.
The benchmark cash/threes spreads has widened after the delivery - it was at $13.50 as of today, up from $8 on August 12.
The cash/August and cash/September have also turned into a contango of $0.95 and $6.5 per tonne from a backwardation of $0.25 and $2.50 respectively last Friday.
Some trading houses also plans to deliver into LME warehouses, despite the fact that warehouse incentives have dropped to an average of around $30-40 per tonne since July from $50-60 in March-June period.
This is despite current warehouse incentive levels generating a loss in such a transaction - the breakeven level of such transactions would be at around $65 per tonne, according to several Chinese traders.
“The current premiums in Shanghai bonded zone are around $40-50 per tonne plus $20 costs to deliver out of the warehouses and $5 for the shipments. You need either higher incentives or you would need to cover your costs somehow so as to profit from delivery,” one trader said.
Some traders have indeed been able to cover their costs by buying directly at the free-on-board (FOB) rate from smelters which have tolling agreement, which results their in overall costs being approximately equal to the warehouse incentives.
“It is doable. We’ve bought some in July which will be delivered in August,” said another trader.
There are currently 13 Chinese smelters who have tolling agreements - including Jiangxi Copper, Tongling Nonferrous, Yunnan Copper, Jinchuan, Daye Nonferrous, Baiyin Nonferrous, Zhongtiaoshan, Xiangguang Copper, Dongying Lufang Metals, Zijin Copper as well as Zhejiang Jiangtong Fuye Heding Copper, Henan Yuguang Gold & Lead Group and Chifeng Yuntong Nonferrous Metals.
Despite the loss, some traders could also be looking at delivering large amount of copper in hope that LME copper prices could fall to levels that would be beneficial for their futures positions, sources suggested.
“They may have a large number of put options on the LME copper, so they want to first store a lot of metals off-warrant, and then wait for the right moment to deliver in hope that prices on that day could drop to the level which they could exercise their options,” said a third trading source.
There were 202,375 tonnes of copper registered on the LME warehouse sheds on Friday, of which, 152,275 tonnes or 75 percent were located in Southeast Asian warehouses, up from 25 percent since end-March.
(Editing by Vivian Teo)