Copper Premiums in China Slump to Zero on Arbitrage

Mar 1, (Bloomberg) -- Copper premiums in China, the world’s largest consumer, dropped to as low as zero as international prices rallied more than domestic prices, making imports of the metal expensive.

Premiums paid by Chinese importers over the London Metal Exchange cash price dropped to between zero and $50 a metric ton over the Shanghai price, on a cost, insurance and freight basis, according to metals consultancy CRU International Ltd. That’s lower than $10 to $70 quoted before the weeklong Lunar New Year holidays, which began on Feb. 2, said CRU’s Beijing-based analyst Grace Qu.

China’s imports of refined copper were 245,617 tons in January, customs data showed. That’s the highest level since August and 25 percent more than a year ago. Copper in London has traded at a premium to futures in China, rising 17 percent between Nov. 1 and Jan. 31, compared with a 15 percent gain in Shanghai. Prices in Shanghai include a 17 percent value-added tax and import fees.

"There’s just no incentive to buy imported copper at the moment as the arbitrage isn’t favorable,” Qu said. Arbitrage traders and importers seek to profit by buying metal in London and selling it in Shanghai, exploiting gaps between prices. That trade had been mostly unprofitable since July, according to Bloomberg data.

Copper Exports

Since October, Shanghai’s copper market has been mostly in a contango, where metal for immediate delivery is cheaper than contracts with later dates, suggesting ample short-term availability. Inventories monitored by the Shanghai Futures Exchange were near a nine-month high last week.

"We believe this apparent surplus is due to transient destocking, with the absence of usual Chinese seasonal restocking at the moment,” Goldman Sachs Group Inc. analysts including Jeffrey Currie wrote in a Feb. 25 report.

China’s refined-copper exports more than doubled in January from a month earlier, climbing for a third month to 23,193 tons, customs data showed, as the higher London prices encouraged traders to sell overseas instead of domestically.

Stockpiles in London Metal Exchange warehouses in South Korea, Singapore and Malaysia, the locations nearest to China, were 117,125 tons yesterday, the highest level since March 2010.

"The physical market has been very quiet even after the Chinese New Year break, as consumers are waiting for the price to drop while traders are withholding supplies because selling imported copper is a loss-making enterprise at the moment,” said Pang Ying, an analyst at Shenzhen Rongtuo Trading Co.

Copper for three-month delivery on the London Metal Exchange declined 0.5 percent to $9,833 a ton at 12:22 p.m. Singapore time, snapping a three-day winning streak. The contract reached a record $10,190 a ton on Feb. 15. Futures on the Shanghai Futures Exchange were dropped 0.4 percent to 74,020 yuan ($11,266) a ton.