LONDON It's been a tough week for copper bulls.
The price of benchmark three-month delivery copper on the London Metal Exchange (LME) has slumped almost $250 to a current $4,498 per ton, the lowest level since February.
Copper is now challenging out-of-favor lead as the worst performing base metal so far this year.
This is not a story of macro headwinds. Zinc, for example, hit a fresh one-year high above $2,100 per ton on Thursday.
Rather, it is all about the surge in LME copper stocks, a total 65,550 tonnes hitting the LME warehouse system in the first four days of the week.
Headline registered inventory hit a four-month high of 213,225 tonnes as of Thursday's daily report.
At first glance this might appear to be no more than an acceleration of the recent rebalancing of global inventory away from a sated Chinese to a depleted LME market.
But the timing and scale of the inflows suggest that there was more going on than just fundamentals.
This week's events bear all the hallmarks of a battle between two of the market's bigger players for control of the London copper spreads.
OVERRIDING THE TREND
This week's inflow of copper was largely concentrated on just four LME locations: Singapore (39,650 tons), Taiwan (3,850 tons) and the two South Korean locations of Busan (11,450 tons) and Gwangyang (6,800 tons).
All four have seen sporadic arrivals of copper since the start of April, roughly corresponding to export flows out of China over the first few months of this year.
Chinese exports hit a near two-year high of 32,400 tonnes in April, bringing the year-to-date tally to 75,500 tonnes. How much was exported in May will only be known when the full trade figures are released later this month.
The consensus is that outbound flows will have remained robust, given high bonded stocks at Chinese ports and correspondingly weak physical market premiums.
The small handful of Chinese smelters permissioned to export copper without paying the export tax will almost certainly have been enticed to continue shipping material by the combination of the cash premium on the LME and delivery incentives offered by LME warehouse operators.
But when large tonnages of any metal hit the LME warehousing system over a limited timeframe, it's a tell-tale sign that the material hasn't just physically arrived at the port the prior day.
More likely is that it was already sitting in situ in off-market storage or was gradually accumulated before being placed on warrant, at which stage it "shows up" in the LME's stock reports.
Singapore, for example, saw 18,350 tonnes of warranting activity in Tuesday's stocks report. The previous highest daily inflow since copper arrivals began in early April was just 4,800 tonnes.
All the evidence suggests this week's "arrivals" were coordinated and executed to have maximum impact on the market.
Graphic on LME copper spreads and stock inflow:
BREAKING THE BACK(WARDATION)
To understand why someone may have wanted to flood the London market with copper, you need look no further than the LME's market positioning reports.
What the exchange terms a dominant long position emerged on the copper market last week.
This player controlled 50-80 percent of all LME open stocks, excluding metal earmarked for physical load-out, and had bulked this up with cash positions to the point that its overall position represented in excess of 90 percent of all available stocks.
That position was being rolled forward daily, forcing shorts to pay the backwardation price as they too rolled their positions.
The cash premium over three-month metal, the backwardation, had flexed out as wide as $27.75 per ton the previous week as the long tightened its grip on the London market's nearby date structure.
Someone, it seems, was not prepared to pay the roll price and decided to deliver physical metal against their position.
And they did so in a way to generate the maximum bang for their buck.
It seems to have worked.
That cash premium has evaporated. As of Thursday's close, the cash-to-three-months spread was valued at $15 per ton contango.
The ripple effects have spread down the curve, LME broker Marex Spectron noting that the July-December spread eased $10 to $35 per ton contango over the course of Thursday.
The latest positioning reports, denoting the state of play as of Wednesday's close, show the dominant long still holding 50-80 percent of stocks <0#LME-WHL> but with no equivalent cash position <0#LME-WHC>.
The war may continue but it's clear who won this particular battle of the LME copper spreads.
MORE TO COME?
This morning's LME stocks report showed no copper arrivals at all, suggesting that this week's flood has now abated.
Will more arrive?
It seems likely that there will be a resumption of the sporadic inflows seen earlier as long as Chinese smelters favor the LME over the domestic market.
Set against this outbound flow, however, is a continued much stronger import flow.
Imports of refined copper totalled 1.45 million tons over the first four months of this year, up 27 percent year-on-year.
The preliminary figures for May suggest the import pace may be slowing but is still running much higher than year-earlier levels.
It's worth bearing in mind that China is still absorbing more than the entire LME stocks total every month.
Its appetite is surprising given the combination of slower usage growth and higher domestic output of refined metal.
But the simple fact is that every ton that enters China is a ton that is not destined for an LME warehouse.
That said, if this week's events have taught us anything, it is that there is evidently still a lot of free metal available for LME delivery.
Whether it gets delivered in such quantities as just seen is going to depend on whether the two parties involved in this week's battle of the LME spreads resume hostilities in the coming weeks.
(Editing by David Evans)