March 20, 2013 / 8:01 AM / 5 years ago

LME, Shanghai copper prices widen to best arbitrage since 2011

* Cash arbitrage expands this week as LME falls

* Fabricators build metal stocks for the first time this year

* Bonded stocks premiums $70 to near $90 this week - trade

By Polly Yam

HONG KONG, March 20 (Reuters) - Price spreads of cash copper on the London Metal Exchange and the spot Shanghai market have widened to the best arbitrage opportunity for imports into top consumer China since late 2011, although already high stocks may cap fresh orders.

Any increased arbitrage trade, however, would speed up the decline of falling bonded warehouse stocks in Shanghai, and ease worries that China’s refined copper imports will remain weak this year due to the existing large inventories.

Investors had already moved some bonded stocks into the domestic market around the beginning of the month ahead of the peak demand season, reducing the Shanghai stockpiles more than 10 percent from a record hit in January.

“We believe the arbitrage could stay open in the second quarter,” said a trader at a large trading house, who declined to be named because he was not authorised to talk to the media.

“Fabricators have been buying. They are preparing for stronger demand as the peak consumption season is approaching.”

Fabricators, which typically buy the metal to manufacture semi-finished or finished copper products, were buying spot metal this week in the domestic market or from the bonded stocks to build up refined copper inventories for the first time this year, traders said.

The cash arbitrage opened last week and the gap has expanded this week as LME prices fell faster than prices in China, prompting investors and fabricators to boost buying of physical metal and move more bonded stocks into the domestic market.

Cash LME copper fell more than 3 percent to about $7,537 per tonne on Wednesday, from last Friday, versus a 2.4 percent fall for spot metal in Shanghai CU-1-CCNMM at about 55,515 yuan ($8,900).

Buyers have paid premiums between $70 and near $90 a tonne over the cash LME prices this week to secure bonded stocks in Shanghai, up from premiums of $65 to $85 a tonne at the beginning of this month, traders said.

The firmer spot metal price was attributed to reduced supply from two large refined copper producers that are currently conducting maintenance and because some producers were not willing to sell large volumes at prices below 56,000 yuan, traders said.

One of the producers down for maintenance, Baiyin Nonferrous, plans to reopen its 160,000-tonne-a-year facility on April 15, a source at the firm said.

Power cable manufacturing plants in the eastern industrial region have received more orders in the past two weeks, also pushing up demand for physical copper, Jing Chuan, chief researcher at Citic Futures said.

The power sector accounted for near half of China’s 7.7 million tonnes of refined copper consumption last year, according to data from state-backed research firm Antaike.

The demand from fabricators and the power sector has not yet boosted orders for forward inbound shipments of spot refined copper, however, because stocks in bonded warehouses in Shanghai remain high, traders said.

Stocks are currently down more than 10 percent from a record high reached in January.

Bonded stocks in Shanghai were estimated by traders at about 850,000-870,000 tonnes last Friday versus about 910,000 tonnes in late February and a record of around one million tonnes in late January.

$1 = 6.2157 Chinese yuan Reporting by Polly Yam; Editing by Tom Hogue

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