(Repeats with no changes. The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, Aug 26 (Reuters) - A wave of copper is currently washing up in London Metal Exchange (LME) warehouses.
Arrivals of metal have totalled 73,325 tonnes this week, lifting headline exchange inventory to 271,575 tonnes, the highest level since October last year.
There’s no big mystery as to where this metal is coming from. Surging arrivals at LME sheds in Singapore and South Korea have broadly corresponded to export flows out of China.
And in part this is no more than a continuation of the stocks rebalancing that has been playing out for several months, a refilling of a depleted LME system from high inventories in China that accumulated earlier this year.
But unlike the mini surge of LME arrivals in early June, there is no obvious bull-bear battle being waged across the front part of the London copper curve.
If no-one is being forced to deliver metal against a short position, the alternative explanation would be that this is China pushing out surplus.
If so, it would mean that copper oversupply, already clear to see at the raw materials stage of the supply chain, is finally starting to take manifest form in the refined metal arena.
Graphic on Chinese exports 2016:
Chinese exports vs LME arrivals 2016:
It’s not unusual for LME copper stocks to trend higher during the dog-days of northern hemisphere summer as manufacturing activity drops a gear.
And, conforming with that pattern, warranting of metal has taken place at a wide variety of LME good delivery points, including Hull in Britain, Bilbao in Spain and several U.S. locations.
But the real stand-out has been the accelerated flows at Singapore, which has received almost 95,000 tonnes since the start of June, and South Korea, which has taken in 103,000 tonnes.
Both countries have also featured prominently in China’s export profile over the same period of time.
Customs data shows exports of 89,000 tonnes to Singapore and 76,000 tonnes to South Korea since March, when China’s exports first started accelerating. Between them Singapore and South Korea have accounted for almost 60 percent of all outbound flows.
The correspondence between Chinese exports and LME arrivals isn’t perfect (see the chart above) but the broad picture is one of metal leaving China and turning up in the most easily shippable LME locations.
The question is whether this metal is being pushed or pulled.
A mini-surge of copper arrivals in the LME system in early June bore all the hallmarks of a distress delivery by a short position holder facing a cash-date squeeze.
What’s noticeable about the current flood is that there is no similar tension in the LME spreads.
True, the LME’s market positioning reports show a dominant long holding between 50-80 percent of non-cancelled stocks and 40-50 percent of cash positions as of the close of business Wednesday.
But ever since the bull-bear battle of early June the front part of the curve has been trading in benign contango. The cash-to-three months period traded as wide as $27 per tonne backwardation in late May. As of Thursday’s close it was valued at $9 per tonne contango.
The very front part of the curve, between cash and the September prime prompt on the 21st of the month has tightened up a little over the last couple of days but is still only quoted at level.
Any pull on extra units to alleviate LME spread stress is currently weak, in other words.
That’s not to say there is no gravitational pull at all, rather it has been coming in the form of incentives offered by LME warehouse operators in the Asian region.
That particular magnet, however, only really works if the incentives are competitive in terms of physical premiums, first and foremost in China itself.
Which it seems they are.
Premiums for delivery to China are trading at a soggy $45-50 per tonne over LME cash prices, according to LME broker Triland Metals.
To put that figure into context, remember that Chilean producer Codelco’s “benchmark” premium covering 2016 shipments to China was set at $98 per tonne.
Nor is there any obvious indication of tightness within the mainland market, Triland again noting that the domestic premium structure is largely flat against front-month Shanghai Futures Exchange contracts.
All of which tells us that the Chinese market right now seems very comfortably supplied, if not oversupplied, with physical refined copper units.
To the point that LME warehouse operators can probably match if not better Chinese premiums, stimulating a physical arbitrage.
So who is actually moving the material?
Some of it seems to be coming from Chinese smelters themselves, or at least the handful that have clearance to export without paying the export duty.
Modest exports to countries such as Thailand, Vietnam and Bangladesh have no obvious LME arbitrage significance since none of them host LME warehouses.
But there is almost certainly a second stream of exports being shipped by merchants from China’s bonded warehouse zones.
Or maybe that should read “re-exports”. Copper in bonded warehouses has not yet been subject to China’s VAT and can turn around and head back out without any tax penalty, albeit showing up in the customs figures as bona fide “exports”.
So if China is pushing out surplus copper, or at least exerting a lesser magnetic pull than that offered by LME warehousers, what does it say about the health or otherwise of Chinese demand?
Not as much as you might think.
China’s apparent consumption, a back-of-the-envelope calculation factoring in production, imports and visible stocks movements, jumped by 11 percent in the first half of this year.
Not even the most exuberant bull would argue that real consumption growth was anywhere near that level. The spectrum of estimates is a wide one but the middle ground would be around three percent.
The implication is that there has been significant stocks build, possibly on the mainland, possibly in bonded warehouses and most probably a combination of the two.
China, in other words, is full of copper.
And getting fuller, because the other dimension to this mass stocks relocation is China’s own production of refined metal, up almost 10 percent in July and up by around eight percent over the year to date.
That of course is a reflection of the oversupply in the raw materials market and the subsequent flow of concentrates into what is the world’s largest smelting and refining base. Imports of concentrate have surged by 35 percent so far this year with the pace accelerating steadily over the last few months.
The tension between this domestic production surge and the strength of import demand was ratcheted up over the first part of this year.
We’re now seeing it resolved in the form of higher exports and rising LME inventories.
It is starting to look as if the copper surplus, so obvious in the concentrates market and yet so elusive in the refined market, is now finally taking concrete form in LME sheds in Singapore and South Korea.
Editing by David Evans