* Copper market backwardation could spike
* Large copper stocks position returns to LME
* Available LME copper stocks down 75 pct since March
By Eric Onstad
LONDON, Feb 13 A short, sharp squeeze could be
on the cards for physical copper markets as inventories fall and
healthy demand outpaces expected new material from smelters.
Analysts expect the market to be weighed down by a surplus
later this year due to rising mine output, but for now
availability of refined copper is tight.
"There is clearly a substantial risk that the copper market
could invert more aggressively during the early part of the year
before higher refined output finally pushes the market into
surplus," said Nic Brown, head of commodities research at
"If anything were to occur which might impact supply
unexpectedly ... then the market might find itself staring at
the prospect of a brief but very painful shortage of metal."
The shortages are showing up in copper on the London Metal
Exchange (LME), which has been in backwardation for over a month
- a situation in which the nearby price is higher than the
forward price due to strong immediate demand.
The premium of cash LME copper over three-month copper spiked to a peak of $64.50 per tonne on Jan. 21, the
highest since May 2012, and was last quoted at $43. The premium
could spike to $300 if the market is squeezed, Brown said.
The market is vulnerable because LME on-warrant inventories - those available for withdrawal - have tumbled
by 75 percent since last March to 125,675 tonnes.
Consumers who need copper and speculators betting on lower
prices could find themselves squeezed if shortages emerge and a
big player builds back a position in LME inventories.
In December, one party gathered 50-80 percent of available
LME copper stocks and over 90 percent of combined stocks and
short-term trading instruments, a position worth nearly a
billion dollars on paper.
That huge position was liquidated a few weeks ago as prices
declined and after short holders rolled positions into future
months, lessening the chances of making money from a squeeze.
But a battle between longs and shorts may only have been
postponed as a sizeable position in copper reappeared this week.
LME data showed one investor holding 30-40 percent of
available stocks while two other parties had big
short positions in March futures, one with 10-19 percent and the
other with 20-29 percent of the market.
"It kind of looks like the focus of the squeeze is shifting.
I think the dominant position will come back towards the end of
February as the March date (futures expiry) approaches," said
Wiktor Bielski, head of commodities research at VTB Capital.
Investors betting on lower prices and consumers who need
supplies are counting on smelters to step up the pace of
processing after stronger mine production last year resulted in
stockpiles of concentrates.
Refined copper output in top consumer China in December fell
5.9 percent from the previous month to a three-month low.
Higher processing fees were expected to give incentives to
Chinese smelters, but this may not provide as much of a boost as
expected, especially due to shortages of scrap metal needed to
blend with concentrates, an industry source said.
"I really don't think there's a huge amount of scrap in the
system so I think in the next four to six weeks we'll see the
scrap market get very tight, which will put constraints on
refined production," said the source.
"I think it (physical shortages) will last three months at
least. It's no science that Chilean refined output is having
In Chile, the world's biggest copper-producing country,
overall smelter output dropped by a quarter in December after a
strike at Codelco's Chuquicamata smelter while port strikes also
put a lid on copper exports. [ID:nL2N0K50BQ}
Those who caution about refined shortages also point to
Indonesia, which banned unprocessed ore exports in January but
later loosened restrictions on copper.
"I think many people are underestimating demand and
overestimating supply, particularly when you look at what's
happening in Indonesia. It's not at all clear what's going to
happen to concentrate exports," Bielski said.
Freeport-McMoRan Copper & Gold and Newmont Mining
Corp are in talks with the government about a new tax
and have yet to resume exports, while a trade group has filed a