Europe copper premiums rise as consumers outbid warehouses

Wed May 8, 2013 7:29am EDT

Related Topics

* Premiums exceed $100/t on scrap shortage, port strike, shutdowns

* Copper stocks fall at Trafigura's backlogged Antwerp warehouses

* Producers will rather sell stock to consumers - producer source

By Maytaal Angel

LONDON, May 8 (Reuters) - Premiums to secure copper in Europe have pushed above $100 a tonne as a scrap shortage, combined with a maintenance shutdown at a big producer and a Chilean port strike, have led consumers to outbid warehouses for spot supply.

Premiums are paid over the London Metal Exchange (LME) cash price to cover delivery costs such as transport and insurance, but they tend to rise above those costs when supply is scarce or demand strong.

They have been rising steadily in Europe this year as trading house Trafigura's warehouse firm NEMS paid incentives of around $80-100 a tonne to attract copper to its sheds in Antwerp.

There is so much metal at the port that it takes months for clients to withdraw stock, earnings NEMS substantial rental revenue in the meanwhile.

The increase in premiums long frustrated consumers making products like copper wire and rod, as it increased their costs by lifting premiums to the same level as the warehouse incentive payment, despite a surplus of supply and weak demand.

More recently, however, consumers and other market participants say they have been outbidding NEMS, paying premiums of around $95-$110 a tonne for grade A copper on the spot market in Rotterdam, from $50-$70 in late February.

According to some market participants, premiums were last at these levels in early 2011.

"All consumers are tapping the spot market more," said a Europe-based copper consumer.

"The tightness in scrap is a worldwide situation. Chinese secondary refineries, which have to be fed scrap, are bidding more aggressively in other markets, including in Europe," the consumer added.

Copper demand has been weak in Europe this year due to poor to non-existent economic growth, while global copper supplies have been rising. Despite this, a supply squeeze has emerged.

The tightness is due to maintenance shutdowns at Boliden's smelters in Sweden and Finland, a port strike in Chile earlier this year that blocked nearly 60,000 tonnes of copper exports from Codelco, backlogged stock in Antwerp warehouses and the shortage of scrap.

SCRAP PROBLEM

Scrap supplies always dwindle when LME prices decline, as merchants decline to crystallise losses by selling it at a lower price than they paid, and as holders of junk metal have less incentive to sell to merchants.

LME benchmark three month copper futures hit 1-1/2 year lows last month and are down some 8 percent for the year.

The scrap shortage is a particular problem for consumers, as it forces them to tap the spot market for more costly refined copper to use as an alternate feedstock for making products.

This consumer buying is unwelcome rivalry for warehouse owners.

"We would rather sell to consumers. If consumers are paying competitive premiums I don't think anybody will deliver to Antwerp. Trafigura will have to pay higher incentives at the moment," said the European copper producer.

Trafigura declined to comment on its warehouse operations.

According to LME data, copper stocks in Antwerp have been rising steeply this year. By April 12, they accounted for nearly all exchange registered copper stock in Europe. MCUSTX-TOTAL MCU-BEANR-TOT

Since then, however, copper stocks at the port have declined by around 3,000 tonnes. Since late April meanwhile, stocks of lead have declined by some 2,500 tonnes, while zinc stocks have declined by some 65,000 tonnes since mid-February. MZN-BEANR-TOT MPB-BEANR-TOT

Although Trafigura's NEMS is not the only warehouse owner in Antwerp, industry sources say most of the logjammed metal there is located in its sheds, meaning the recent decline of metals stocks there will hit its rental revenues the hardest.

"They (NEMS) will have to offer $110 a tonne or they won't get copper units in, and if they don't get units in, the queues will get shorter," a physical copper trader said. (Reporting by Maytaal Angel; Editing by Anthony Barker)

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