How to View the LME Backwardation/Contango in the Future Market After SHFE Copper Contract Rollover Delivery Under High BACK? [SMM Analysis]

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       May 15 was the last trading day for the SHFE copper 2505 contract. The spot market basically started quoting prices against the SHFE copper 2506 contract. As the price spread between futures contracts mainly fluctuated within a BACK range of 420-450 yuan/mt on the last trading day, spot prices against the SHFE copper 2506 contract were at a premium of 400-450 yuan/mt. As the delivery of the SHFE copper 2505 contract approached, the open interest corresponding to the delivery volume was significantly different from the existing delivery warrants. On May 14, amid favourable macro front, the fundamental factors of SHFE copper also provided support, driving the price to surge above 79,500 yuan/mt. During this period, selling orders on the futures market increased, leading to a retreat in gains.

       On May 13, SHFE copper futures warrants increased by 9,073 mt to 29,157 mt, with an increase of 7,521 mt to 20,790 mt in the Shanghai region. Notably, C.Steinweg Waigaoqiao increased by 5,945 mt to 5,970 mt. On May 14, SHFE copper futures warrants increased by 20,912 mt to 50,069 mt, with an increase of 18,001 mt to 38,791 mt in the Shanghai region. Notably, C.Steinweg Waigaoqiao increased by 4,030 mt to 1,000 mt. In just two days, warrants in the Shanghai region surged significantly, and the total futures warrants at the normally inactive C.Steinweg Waigaoqiao reached 10,000 mt.

       From a three-year historical perspective, the futures warrants at C.Steinweg Waigaoqiao have generally remained at a low level. A significant increase in warrants typically occurs around the time of contract rollover for SHFE copper futures, especially when the BACK spread between consecutive months is relatively high, such as on July 15, 2022, and May 15, 2025. As the BACK spread between consecutive months widens, the increase in warrants at this delivery warehouse becomes more pronounced.

       It is noted that the growth rate of futures warrants at this warehouse is rapid, and so is the rate of liquidation. Basically, after the high BACK spread during the rollover of the front-month contract leads to a high premium in the next-month contract, the futures warrants at this warehouse will be quickly converted into spot cargo for sale, mostly taken by downstream end-users. After the delivery of the SHFE copper 2505 contract, the outflow of a large number of warrants will become the most direct factor constraining spot premiums.

       Looking ahead to the SHFE copper 2506 futures month, there are still smelters in China undergoing maintenance, and the direct delivery of smelter supplies to warehouses is limited. However, due to the high spot premiums of SHFE copper attracting supplies from north China, it is expected that some supplies from north China will flow into east China. The mutual cancellation of 91% of tariffs between China and the US has led to a recovery in end-user export orders. According to SMM's communication with the market, orders for electronic and electrical appliances have significantly improved, and orders from the Southeast Asian market have shown a YoY increase. Domestic factories even have recruitment needs. However, according to feedback from enterprises, factories currently have sufficient raw materials such as copper wire and cable and other copper semis. It will take 10-25 days for the impact to be transmitted to the mid-to-downstream copper processing materials sector. Therefore, it is expected that the operation rate of copper rod and other products will improve again in June (calendar month). Attention can be paid to the downstream stocking situation before the Dragon Boat Festival.

       During this period, there are the following risk factors:

       It has been observed that LME Asian inventory is being significantly depleted, and Asian warehouses are rapidly destocking. Most of this inventory is from the export shipments of domestic smelters in the early stage. If it is subsequently brought back to China, there will be factors that could push premiums down. However, caution should be exercised if there are still signs of a continuous expansion in the BACK price spread between futures contracts for SHFE copper contracts 2506-2507. Such inventory may still exist in the form of futures warrants in SHFE delivery warehouses.

       In summary, after contract rollover, spot premiums will go through three stages: First, due to the limited availability of warrants, a large amount of circulating inventory will lead to a temporary spike in premiums after contract rollover; second, the release of delivery warrants will put pressure on premiums, causing them to pull back; third, after the warrants are consumed, with the continued low inflow of inventory into social warehouses and an improvement in downstream operations leading to an increase in cargo pick-up and destocking, premiums will rebound again.

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