(Repeats column from October 19 without change)
By Andy Home
LONDON, Oct 19 (Reuters) – The amount of copper available in the London Metal Exchange’s (LME) warehouse network has halved in the past eight days.
Initial stocks of 139,000 tonnes may seem healthy enough, but a series of daily cancellations means that 48% of this tonnage is now awaiting physical loading, leaving only 72,950 stocks alive.
The stock grab seems odd, given the rapidly darkening demand outlook as Europe heads into recession and U.S. manufacturing growth slows sharply.
But the index is in China, where pressure on the Shanghai Futures Exchange (ShFE) has generated a run for the metal.
SHANGHAI TIGHTEN
The ShFE copper contract has been characterized for some time by low inventories and continued tightness. But things have picked up speed since the market reopened after the Golden Week holiday and as the October contract expiration approached on Monday.
Market open interest jumped to 454,074 contracts at the end of last week, the highest level of participation since 2015, as the front end of the curve tightened.
Deliveries against short positions accelerated. Total recorded stocks of ShFE more than doubled over the festive period to 63,746 tonnes, with stocks under mandate rising from 3,729 to 25,588 tonnes.
More arrived this week, with mandated stocks exploding to 70,547 tonnes on Tuesday.
Shanghai now acts as a magnet for copper units available in China and the rest of the world.
YANGSHAN STOPS SUPPLY CHAIN
Clearly the first point of call for Shanghai shorts has been the copper that sits in the city’s bonded warehouses.
The Shanghai International Copper Contract, traded through the International Energy Exchange (INE), is backed by these stocks. Registered stocks plunged from 88,861 to 28,389 tonnes during the Golden Week holiday, by far the biggest change in INE stocks since the contract was launched in early 2021.
Local data provider Shanghai Metal Market (SMM) assesses levels of broader bond stocks, sometimes referred to as “social stocks”. These also fell to 30,100 tonnes after a peak of 293,500 tonnes in March.
As bonded stocks quickly deplete to fill ShFE warehouses ashore, physical bounties in turn rise to attract more metal from the international market.
The Yangshan copper premium, a useful indicator of China’s spot import demand, climbed to $147.50 a tonne against LME cash, its highest trading level since 2013.
The high premium for Chinese delivery is now sucking metal from the rest of the world, including LME warehouses in Asia, where all the cancellation activity has taken place over the past week.
SUPPLY DISRUPTED?
Shanghai’s metal rush is surprising given that China’s refined copper imports have been proceeding at a rapid pace in recent months. Net imports of 2.31 million tonnes in the first eight months of the year were up almost 10% compared to the same period of 2021.
However, these entries bypassed both bonded and onshore warehouses to replenish a depleted national supply chain after a long period of destocking due to record prices earlier this year.
It’s likely that struggling trading house Maike Group is also somehow in Shanghai’s copper cocktail at the moment.
The company, which is actively selling assets to forestall a cash crunch, is a copper powerhouse, typically handling around a quarter of China’s import volumes each year.
Its ongoing restructuring, which includes the liquidation of copper stocks, is likely to disrupt normal trade flows through the bonded warehouse system.
LONDON’S RUSSIAN DILEMMA
China’s strong call for copper is being felt in London, where the fall in LME shares has revived volatility over time.
The benchmark three-month cash spread has been declining since mid-September and the cash premium was valued at $60 a tonne at Tuesday’s close.
The micro tension continues to clash with the macro bearish picture, which has kept copper three-monthly under pressure near its July low at $6,955 a tonne, last traded at $7,375.
The micro-macro divergence is likely to widen as LME stocks are stripped for shipment to China.
There is an additional complication for the LME, which has launched a discussion paper on whether to suspend shipments of Russian-branded metal.
More than 60% of LME copper stocks at the end of September were Russian metal. It’s entirely possible that the ratio is set to rise further as total stocks dwindle and what’s left becomes increasingly concentrated in the European ports of Hamburg and Rotterdam.
Both are obvious shipping destinations for the two Russian copper producers and they currently hold a combined stock of 42,425 tonnes of cattle, equivalent to 58% of the rapidly shrinking total.
Neither site was affected by the recent flurry of cancellation activity, which understandably took place in Asian sites within much quicker reach of the Shanghai shorts.
While this week’s huge flows of aluminum into LME warehouses have inevitably turned the spotlight on Russian aluminum producer Rusal, copper inventory movements could become a bigger issue sooner. The opinions expressed here are those of the author, columnist for Reuters
(Editing by David Evans)