Resurgent arbitrage opportunity bolsters Yangshan copper premium to 2019 high

SHANGHAI, Sep 20 (SMM) – Yangshan copper premiums, paid on top of LME copper prices to import the metal into China, rose by $8/mt, the largest one-day gain in 2019 to $78-88/mt for warehouse warrants on Thursday September 19, showed SMM assessments.

This was the highest level this year, and in line with Codelco’s 2019 premium for China at $88/mt cif Shanghai. Premiums for bill of lading stood at $75-85/mt as of September 19.

The recovery of the price ratio of SHFE copper to its LME counterpart reopened the import arbitrage window, and encouraged buyers off the sidelines. The SHFE/LME copper ratio rose to 8.17 on September 19.

Buyers showed strong interest in warehouse warrants and bill of lading that will arrive in about a week. Quotes for cargoes that will arrive in the second half of October also climbed.

Rising premiums across the domestic market also helped grow profits on imports, as limited supply pressure and improving consumption led to shortages in some Chinese regions. Lifting domestic premiums was also raw material stockpiling by downstream consumers to prepare for the week-long National Day holiday.

Customs data showed that China’s copper imports in the first seven months of 2019 declined about 280,000 mt from the same period a year earlier, while copper stocks in Shanghai bonded areas have been on the decline since May and stood at just 327,000 mt as of September 12.

Supply tightness has been supportive of Yangshan copper premiums, and deterred some sellers from offloading their cargoes in a rising market.

Yangshan copper premiums are unlikely to pull back in the near future, as SHFE copper will continue to outperform its LME counterpart. Previous large deliveries to LME-approved warehouses grew LME copper inventories, which kept LME copper cash in a deep discount against the three-month contract.  

On the SHFE, however, a backwardation structure emerged as limited production growth and a high consumption season in September-October in China grew investor confidence in near-term copper contracts. SMM learned that blister copper supply shortfalls subdued production at some Chinese smelters.

Yangshan copper premiums will likely continue to climb if imports further shrink in the second half of the year, SMM believes.