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Subdued copper demand in top consumer China and the delivery of surplus metal to the London Metal Exchange (LME) approved warehouses has propelled the price discount for nearby contracts against the benchmark contract to record highs.
The contango or discount for the LME cash contract over the benchmark or three-month forward jumped above $160 a metric ton this week compared with levels around $70 only two months ago.
Copper inventories in LME warehouses at 206,775 tons have doubled since the middle of May to their highest since October 2021. Most of the deliveries were to warehouses in South Korea and Taiwan, the nearest delivery locations for exports from China, usually a net importer.
Reuters reported in May that Chinese copper producers were planning to export up to 100,000 tons of metal.
“Stock deliveries to LME continue” said Marex metals strategist Alastair Munro.
“This ties in with reports that China’s production in June rose 9.5% y/y to 1.005 million tons and previous reports that amid a dearth of genuine Chinese physical demand, smelters there were going to deliver (to LME warehouses).”
Producers, consumers and traders often sell surplus metal on the LME as a market of last resort because their businesses need the cash flow.
Financing banks and commodity traders buy this metal and sell it for a future date at a higher price to make a profit after costs which include warehouse rent and insurance and known as the “carry trade”.
Industry sources say the reason behind record high contangos is climbing costs of financing metals fuelled by higher interest rates, specifically US interest rates as commodity transactions are typically in dollars.
“Contangos reflect the cost of holding physical metal. When costs rise the contango goes up. The biggest cost increase comes from dollar interest rates which are not half a percent any more,” a copper trader said.
“The (copper) amounts warranted in such a short space of time are substantial and it looks like there is more to come.”
Three-month copper at around $9,800 a ton has dropped more than 10% since hitting an all-time high above $11,100 on May 20.
(By Pratima Desai; Editing by David Evans)
Comments
Pankaj Sinha
Loved this article. It’s aways pleasure to get an insight on the business influencing the commodity prices.