(Repeats without changes to widen readership)
By Josephine Mason
NEW YORK, June 12 Thousands of tonnes of
"invisible" copper now being hurriedly ushered out of some
Chinese warehouses may remain out of sight for months longer, as
banks and traders seeking safer havens for their metal opt out
of the London Metal Exchange network.
The fear of fraudulent financing at some storage depots in
Qingdao port has prompted some banks and merchants to cut credit
for financing deals or relocate metal to better-known
warehousing firms, including some in South Korea and elsewhere
that are part of the LME's vast system.
The shift away from China's opaque warehouses fueled concern
among traders of a potential rise in stockpiles warranted in the
LME network, data that would likely add pressure to sliding
prices. As much as 300,000 tonnes of copper, nearly twice the
entire inventory held in the LME's global warehouses, could be
released by September, according to analysts at Macquarie.
But it is far from certain how much, if any, of that metal
will appear in the LME's daily tallies, say some market sources
familiar with the complex financing deals that have ballooned
with China's loose access to credit.
Some of the metal is staying in China, moved to warehouses
owned directly by operators, rather than rented by
third-parties, say people involved in the market. That would be
enough to placate companies worried about whether their stocks
have also been pledged as collateral on another loan.
Alternatively, it may still get sent abroad but to sheds run
by exchange-approved companies in "off warrant" storage outside
of the LME's official accounting system, some said - ensuring it
is safe and secure but not necessarily deliverable.
The uncertainty over how much metal is being moved, and
where it will end up, is the subject of frenzied speculation as
banks scramble to assess their exposure to the alleged fraud,
which has roiled the global copper market over the past week.
"The unwinding of these deals may impact the price, but it's
not as easy as saying the market's panicking and the metal will
(reappear in the LME system)," said a source familiar with these
types of deals.
TO WARRANT OR NOT TO WARRANT
The size of unreported copper stockpiles in China has been a
source of mystery and confusion for years, particularly as the
country's booming credit market has created pent-up demand for
metal imports as collateral against loans.
That has bolstered prices and tightened supply. LME stocks
are below 170,000 tonnes for the first time since 2008 and cash
prices were as much as $100 higher than forward prices last
The threat of an influx of copper into LME warehouses almost
wiped out the cash-to-three-month backwardation on the LME last
week. Prices could fall back as low as $6,500 per tonne,
Macquarie analysts said. Three-month prices closed at
$6,690 per tonne on Wednesday.
On Wednesday, Macquarie analysts estimated that almost
300,000 tonnes of copper could be released from bonded storage
in China by September. But they expect another 600,000 tonnes of
copper to remain in place, with the allure of easy lending
overcoming rising concerns about counterparty risk.
"Large and well-established importers have been seen to
survive previous crackdowns and we expect they will again,"
The flow will be at its highest this month with some 110,000
tonnes of metal leaving bonded storage, easing to 90,000 in July
and 90,000 tonnes over August and September.
The LME's electronic system for monitoring ownership of
warrants, or receipt of ownership, make its network an
attractive destination for banks and traders shaken by the
probe. About 700 storage facilities operate in 38 locations in
its global network, which stretches from the Detroit in the
United States to Singapore.
But the LME has not been allowed to operate in China, and
the costs of shipping metal outside of China and higher rent
charged by LME-approved warehouses may offset some banks and
traders' flight to perceived safety in the LME network.
At the same time, metal locked up in so-called repo deals,
which give companies access to short-term credit in exchange for
goods and a mainstay of China's copper market, would logically
stay in China.
So far, there is no sign of the metal's showing up. LME
stocks have fallen by 2,000 tonnes since Reuters first reported
on the Qingdao crackdown on June 2.
Nervous traders are watching the daily data closely.
"Fundamentally, nothing's changed if you look at the stock
numbers," said a London-based LME futures trader. "If Chinese
metal appears on warrant, it's a different matter."
(Reporting by Josephine Mason; Editing by Jonathan Leff and