Copper Premiums in China Advance to Seven-Month High as Demand Recovers

Copper premiums in China, the world’s largest consumer, climbed to a seven-month high this week as end-users boosted purchases following the metal’s decline to the lowest level this year.

Premiums paid by Chinese importers over the London cash price are being quoted as high as $120 a metric ton on a cost, insurance and freight basis to Shanghai, said Zhang Yu, an analyst at Yong’an Futures Co. That’s the highest level since October and compares with about $70 at the start of May, she said. Most deals are being done at $90 to $110 a ton, she said.

The rise in premiums shows that the market is tightening as demand improves, said Jia Zheng, a trader at Shanghai East Asia Futures Co. Shanghai prices have been trading at a discount to London since July, and that discount has narrowed this month, boosting the attractiveness of imported metal. Copper in Shanghai lost 1.7 percent this month, compared with a 2.4 percent drop in London.

“There have definitely been more people asking for metal in the past two weeks as prices dropped,” said Li Ye, an analyst at Minmetals Starfutures Co., a unit of China’s biggest metals trader. “While it’s still not profitable to sell imported copper, the loss is becoming smaller very quickly.”

Copper for three-month delivery on the London Metal Exchange slumped to $8,504.50 a ton on May 12, the lowest price since December, and traded at $9,108.25 a ton at 1:04 p.m. Singapore time today. Metal on the Shanghai Futures Exchange, which includes 17 percent value-added tax, was at 68,000 yuan ($10,478) a ton.

Immediate-delivery copper in Changjiang, Shanghai’s biggest cash market, traded at about 68,975 yuan yesterday.

Copper Backwardation

Near-term supplies of copper in China have been more expensive than longer-dated contracts since April, suggesting demand may be increasing. Spot copper in Changjiang was 895 yuan-a-ton more than futures prices yesterday. Inventories tallied by the Shanghai Futures Exchange declined to the lowest in more than seven months last week, a sign that demand may be picking up.

Stockpiles in the London Metal Exchange’s Asian warehouses are increasing at a slower rate, climbing 5.4 percent this month, compared with 18.5 percent last month, suggesting exports from China this month will fall from April’s record 44,595 tons, said Li. Chinese importers reroute metal to nearby warehouses when the price gap between London and Shanghai makes inbound shipments unprofitable.

Arbitrage trades, in which investors try to gain by exploiting price differences between commodities in different markets, were mostly profitable for copper in China in the six months through July 2010.

“China’s physical copper demand has improved recently,” Christian Schirmeister, executive director at JPMorgan’s global commodities group, said on May 24. Copper stockpiles in Shanghai bonded warehouses have been “drawn down modestly” after reaching as high as 750,000 tons last month, he said. Metal is stored in bonded zones before duties are paid and these holdings aren’t officially disclosed.