Dec 16 (Bloomberg) -- Copper stockpiles in London Metal Exchange warehouses may gain as traders in China re-route metal previously intended for imports because of ample local supplies and slow seasonal demand, according to Sucden Financial Ltd.
"The re-routing will probably continue until Chinese New Year,” said Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden and has been in the metals business for more than 20 years. The week-long Chinese holiday, when many plants suspend output, runs from Feb. 2.
Inventories of copper tallied by the London Metal Exchange rose for a third day yesterday by 7,050 metric tons, the largest single-day tonnage increase since January, to 357,950 tons, according to exchange data. Of that amount, 84 percent entered LME warehouses in South Korea, the location nearest to China.
Copper prices in London, the global benchmark, are in so- called backwardation, where near-term supplies cost more than longer-dated contracts, a pattern that suggests short-term scarcity. In China, by contrast, prices of the metal in world’s biggest user cost more in the future that the spot market.
It makes sense for domestic traders to re-route cargoes of "the metal to LME warehouses since there appears to be demand elsewhere,” Ni Yaoxiang, chief analyst at Sinolink Futures Co., said from Shanghai. The London market "is pricing in a shortage,” Ni said.
Three-month copper in London advanced 8.1 percent this month, compared with a 7.3 percent increase in corresponding Shanghai futures, which include 17 percent value-added tax and import fees. LME copper dropped 0.7 percent to $9,035 a ton at 11:35 a.m.
Singapore time, and Shanghai copper declined 1 percent to 67,230 yuan ($10,092) a ton.
The re-routing away from China was possible "especially if LME copper is in backwardation,” Goldwyn said from Shenzhen,
Guangdong. Cash copper on the LME traded at a $45 premium to three-month futures yesterday, compared with a discount of more than $38 in March. The market has been backwardated since Nov. 8.
Copper inventories in Shanghai Futures Exchange warehouses have risen 33 percent from a 13-month low at the end of September to 115,964 tons last week. Stockpiles in Shanghai bonded warehouses, where traders store shipments before duties are paid, are about three times that level, said Goldwyn.
"You lose money bringing in copper now given the slow seasonal consumption period in China and the negative arbitrage,” said Zhao Kai, an analyst at Jinrui Futures Co. Arbitrage traders try to profit by buying assets in one market and selling them in another, exploiting differences in prices.