LONDON (Reuters) - Escalating tensions in the Korean peninsula are rippling through to metals markets as some banks back away from exposure to large amounts of copper in South Korea, metal industry sources said.
North Korea’s latest test missile flew over Hokkaido in northern Japan on Friday and landed in the Pacific. It traveled about far enough to reach the U.S. Pacific territory of Guam, which the North has threatened before.
Banks’ exposure to copper in South Korea comes in the form of credit lines supplied to holders of metal in LME-registered warehouses in Busan, Gwangyang and Incheon.
“Banks’ risk committees have decided they don’t want this business because of North Korea stepping up its nuclear bomb tests,” a physical trading source said.
“People who can’t finance their own warrants in South Korea have to push the metal back into the market. It’s a vicious circle because the next person probably has the same problem. The market has cottoned onto this, is playing it.”
The benchmark three-month copper forward, near three-week lows around $6,560 a tonne, is down six percent since Sept. 8, after President Donald Trump declined to rule out a U.S. military response following another North Korean nuclear test.
(Graphic for Cash and three-month copper prices, click reut.rs/2xKmvm0)
Even more noteworthy has been the widening discount or contango for the cash copper contract against the three-month forward, flexing out to $46 a tonne, its highest since 2009.
(Graphic for Copper contango, click reut.rs/2jDcdhe)
“Some banks have been told not to finance metal in South Korea because of the threat of conflict,” a metal industry source said. “Half of the available copper is sitting in Korea.”
Total copper stocks in LME warehouses worldwide total 302,925 tonnes, of which 99,125 is earmarked for delivery and so no longer available to the market.
(Graphic for Total copper stocks and canceled warrants in LME warehouses,click reut.rs/2jzXN1a)
Of the remaining 203,800 tonnes, 95,475 tonnes is in South Korean warehouses, mainly in Busan where stocks have climbed 40 percent to 85,575 tonnes since last week.
Graphic for LME Copper stocks in Busan, click reut.rs/2xKcvZR)
“You could move that stock away from Korea, but it would be expensive to transport without an end buyer,” a copper trader said.
Concerns about financing metal in South Korea come amid a tussle between longs and shorts with LME copper stocks surging on the back of physical deliveries onto LME warrant at several locations, including those in Korea.
“A lot of that metal goes on warrant over a few days and is taken off warrant over a period of weeks...someone has been playing the spread for over a year now,” the copper trader said
Fund activity has also played a part in the recent slide, with LME data showing funds’ net long copper position at 71,827 lots on Sept. 8, or more than 1.8 million tonnes, down from a peak of 78,527 lots late in August.
(Graphic for Funds' net long copper position on LME vs prices, click reut.rs/2xJA1WY)
Reporting by Pratima Desai; Editing by Veronica Brown and Adrian Croft