REFILE-Ebb and flow in New Orleans copper stocks distort market -traders

Fri Sep 27, 2013 3:25pm EDT

By Josephine Mason

NEW YORK, Sept 27 (Reuters) - Copper stockpiles in CME Group Inc's sole New Orleans warehouse, owned by JPMorgan Chase & Co, have vanished this summer as quickly as they appeared, spurring fresh talk over how financing deals and off-exchange stocks have distorted supplies and bolstered premiums.

On the face of it, the abrupt decline in inventories a month ago made perfect sense. Domestic demand was improving, exports to China were growing, and Comex offered the quickest way to get last-minute supplies. Exchange warehouses in other locations also saw a draw-down, although not as steep.

But some physical traders in the United States said the drop had little to do with fundamentals. They pointed to London Metal Exchange data showing that its own separate New Orleans warehouse stocks rose by a similar amount that Comex declined, calling it a stark example of the shuffling stocks that have roiled metal markets for years.

"Someone's getting paid to take the metal out (of Henry Bath) and put it back in (the LME system)," said one U.S. trader who has handled U.S. copper for over a decade.

The activity in the Big Easy, one of the biggest delivery locations measured by number of storage facilities, illustrates how base metals are now seeing the big stockpiles, high incentives and long wait times that have beset the aluminum market for the past four years.

Frustrated industrial users say they are paying inflated physical prices for raw material. The situation has drawn scrutiny from British and U.S. regulators and led to class-action lawsuits by end-users.

The port, described by many traders as a "black hole" for copper and zinc because of its distance from industrial users and the logistical difficulties in getting metal out of it, has 60 percent of the almost 1 million tonnes of zinc stored in LME-registered warehouses and almost 40 percent of LME copper.

More than half of the zinc and a quarter of the copper are waiting to be delivered out of warehouses there, but the wait time for metal can be months, dealers said.

With LME warehouse operators offering incentive payments to traders and producers to store metal with them, and stocks in most U.S. LME-registered warehouses declining, traders and end users seeking copper have raided Comex warehouses, where there are no lines and no financing deals.

"Comex warehouses are the only source of freely available metal," said Wiktor Bielski, base metals analyst at VTB Bank.

"(LME) copper in New Orleans is locked up in financing deals and some of it is held off warrant. In a tightening environment, it is very unlikely to be released."

Trucking metal from warehouse to warehouse has also created a "smokescreen", a veteran U.S.-based trader said, giving the impression of dwindling supplies, which has bolstered physical prices in the United States even as other regions have come under pressure, traders said. Copper premiums are between 5 and 7 cents per lb.

FOUR DAYS, 20,000 TONS

The drawdown in New Orleans was conspicuous for its size and speed, but stocks in Comex's other six locations have also fallen, exchange data shows, as traders shipped material to China, the world's largest consumer, where physical prices were almost double U.S. levels.

Copper started leaving Henry Bath's warehouse in New Orleans on Aug. 12, Comex stock data shows, just months after the facility took its first-ever delivery of the metal. The growth in activity in the Comex contract, a distant third among global copper futures, has prompted traders to expand to previously unutilized Comex sheds.

Two days later, Aug. 14, material started arriving in LME warehouses in the port, LME stock data showed. Stocks began to rise for the first time in a month, a sign that metal was being trucked out of Henry Bath and into warehouses registered with the LME, dealers said.

Pacorini, owned by Glencore, has 34 sheds and operates most of the 54 facilities registered with the LME in the port. In addition to its one Comex warehouse, Henry Bath has three LME facilities there.

By Aug. 26, Henry Bath was empty of the almost 20,000 short tons, equivalent to 18,000 tonnes, it had stored there since May, according to Comex data. Four days later, LME copper stocks in New Orleans had risen by just over 21,000 tonnes.

Stocks in U.S. LME-registered warehouses have increased 5 percent since May, exchange data shows, largely due entirely to the build-up in New Orleans, where warehouses pay big incentives to lure in metal.

Supplies in the LME's other four U.S. locations have fallen sharply. In St Louis, three facilities run by Metro and Noble's Worldwide Warehousing Services are almost empty, data show with metal there also being lured to New Orleans on rent deals.

In so-called financing deals that have become rampant due to low borrowing costs and a wide forward pricing curve, it is profitable for traders to store metal in warehouses for long periods of time and to sell forward at a higher price.

'SMOKESCREEN'

Beyond the metal stored in LME financing deals, traders say traders have also stashed big tonnages of surplus metal in New Orleans in off-exchange storage, further distorting the supply-and-demand picture and effectively removing even more metal from the market.

Stocks of 200,000 tonnes in LME warehouses in the port are a fraction of what is sitting off-exchange, dealers said. There are no official statistics to support their claims.

"This isn't transparent," said a second U.S. trader. "There's more copper than people know floating around New Orleans. It'll make you scratch your head."

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