Glencore fills Malaysia's Johor warehouses with copper

Fri Mar 22, 2013 11:09am EDT

* Copper stocks in Johor jump 800 percent since Dec

* Glencore offers $80-$100/tonne to attract metal-sources

* Seeks to lock up metal to generate rentals-sources

By Eric Onstad and Melanie Burton

LONDON/SINGAPORE, March 22 (Reuters) - Commodities trading house Glencore is shunting more of the world's surplus copper into the Malaysian port of Johor, extending a strategy to lock up metal to earn lucrative warehouse rentals and premiums, industry sources say.

Copper stocks at Johor have surged more than eightfold since December and now account for a fifth of total copper inventories monitored by the London Metal Exchange (LME).

Johor is a good location to isolate metal since the port is less accessible than nearby Singapore and it is not an area of strong copper consumption, meaning inventories are likely to remain longer and provide better rental income to the owners, the sources added.

In part, the rise reflects a growing surplus of stock as mine supply growth outpaces demand this year and swings the global copper market out of several years of deficit.

Copper stocks in Shanghai and LME warehouses are the highest in about 10 years, and bonded stocks in Shanghai near records.

It is also a result of a change in China's export duties which makes it easier for Chinese companies to export mountainous domestic stockpiles back into international markets.

But where it ends up depends on who is prepared to pay the best price. And it is becoming increasingly apparent the strongest contender of them all is Glencore's warehousing arm, Pacorini.

"China's smelters are just doing what is best for them. They will ship it to whoever gives them the best price. In Asia, that's Pacorini," said a hedge fund source.

Glencore declined to comment.

Physical traders in Asia and Europe said Pacorini will pay premiums of between $80 and $100 a tonne to get copper because it expects to earn more than that in rental income.

DUAL STRATEGY

Glencore, whose warehouses dominate the ports of Johor, Vlissingen in the Netherlands and New Orleans, has a two-prong strategy, the industry sources said.

"Basically they're hoovering up any surplus at the moment and earning rent. Then when the market hopefully tightens up later in the year, they'll benefit from the premium as well," said an analyst who declined to be named.

Similar tactics have been used by Glencore, rival trader Trafigura and banks such as Goldman Sachs at other warehouses they own.

This has resulted in long delays to access aluminium and zinc despite surpluses of many millions of tonnes.

LME regulations allow warehouses to ship out each day only a fraction of the tonnage they hold, creating long backlogs.

This has infuriated industrial consumers who have been forced to pay record high premiums to get hold of aluminium and zinc quickly. Premiums are paid on top of cash LME prices for metal for immediate delivery.

According to LME data, inventories of copper in Johor have ballooned to 116,650 tonnes, from 12,750 tonnes at the start of December, an increase of 815 percent.

Johor had not seen LME copper stocks of more than several thousand tonnes over the previous decade. At this time last year, they totalled 725 tonnes.

Pacorini is the biggest operator of LME warehouses in Johor. It controls nine warehouses there, two-fifths of the total.

But the port has limited space and is reluctant to offer leases to new warehousing companies as it fears it is over exposed to the metals market already, warehousing sources said.

COPPER LOCATIONS

Pacorini was offering the copper incentives at Johor and New Orleans while Trafigura's warehousing unit, North European Marine Services (NEMS), was doing the same in Antwerp, they added. Those three locations now account for over 70 percent of total LME copper stocks.

Due to warehouse queues and backlogs, much of that material may be difficult to access for consumers, who will be forced to pay up to obtain supplies if demand picks up in China, the world's biggest metals consumer.

"The upshot, for copper premia at least, is that the bulk of the... increase in LME on-warrant copper units seen this year has happened at locations which are impacted, to varying degrees, by long exit queues," analyst Leon Westgate at Standard Bank in London said in a recent note.

"This suggests that any restocking event, when it emerges, will tighten up the market more quickly than many anticipate."

Critics say the warehouse queues and resulting high premiums violate the spirit of the LME warehousing system, which is designed to be the market of "last resort", meaning that industry can use it to sell excess stock in times of oversupply and as a source of material in times of shortage.