By Josephine Mason
NEW YORK, Sept 27 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
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
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.
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."