Japan Quake Pressures Physical Copper Supply In Asia

NEW YORK, Mar 23, 2011 (Dow Jones Commodities News via Comtex) -- Earthquake-related disruptions to copper-smelting operations in Japan are causing a temporary squeeze in the regional physical copper market.

While Japan has no copper mines of its own, the nation is a major copper-smelting hub. Japan exports about 450,000 metric tons of copper each year, buying copper concentrate from mines in other countries and smelting it into sheets of pure copper, known as cathodes.

Asian fabricators, particularly those based in Taiwan, buy the cathodes directly from the smelters and from the physical copper market to produce electrical wire, tubing and other semi-finished products.

The March 11 earthquake and tsunami caused power outages that shut many Japanese copper smelters, constricting available supply for fabricators.

"The longer Japanese smelters remain shut, the more pressing the need for Taiwan to source their cathodes from other nations," said Justin Lennon, base metals analyst at Mitsui Bussan Commodities in New York.

"Taiwan is one of Japan's largest customers, it buys above 200,000 metric tons annually," Lennon said.

Taiwanese and Japanese manufacturers are scrambling to get a share of the copper that is available, driving the premium for physical copper higher.

Traders typically charge a premium over futures prices for the delivery of actual, or physical, copper.

"A lot of the fabrication operations (in Japan) haven't closed down. It makes obvious sense that premiums are going up because you have a number of companies bidding up material in a tight regional market," said David Wilson, director of metals research at Societe Generale.

The disruption to global copper-cathode production is likely to be only temporary, as there is plenty of idle copper-smelting capacity, especially in neighboring China.

"The concentrate that would have been smelted in Japan is likely to be smelted in China or elsewhere globally," said Macquarie Group, which estimated the quake affected about 250,000 metric tons of Japan's annual copper-smelting capacity.

But redirecting concentrate to other refining hubs will take time. In the short term, refined copper is likely to come from inventories at London Metal Exchange warehouses. South Korean warehouses held 107,375 metric tons, Singapore stored 32,075 tons and Malaysia had 1,525 tons, according to the LME's warehouse stock report Wednesday.

"Whoever is holding the metal is going to try to extract the maximum benefit for selling it," Wilson said.