China Spot Copper Premium Surges as Supply Cut: Chart of the Day

Apr 20, 2014 4:03 pm ET

April 21 (Bloomberg) -- Copper fabricators in China, the biggest consumer, are paying the highest premium in 29 months to secure delivery of the metal that’s used in everything from electric wires to water pipes.

Chinese smelters are hoarding the metal in bonded warehouses in an attempt to drive up the local price against the rate in London and sell it abroad at a profit, according to SMM Information & Technology Co. At the same time, local traders have locked up as much as 1 million metric tons as collateral to get credit for other investments, Goldman Sachs Group Inc. said on March 18.

The CHART OF THE DAY tracks spot prices in Shanghai and the futures contract for immediate delivery on the Shanghai Futures Exchange. The lower panel shows the premium reached 585 yuan ($94) a ton on April 16, the highest level since November 2011.

“The premium has surged while stockpiles in the physical market are decreasing rapidly as Chinese smelters are selling their copper to bonded zones,” said Jiang Ning, a senior analyst with Shanghai-based SMM Information.

A higher premium in Shanghai, the hub of China’s base metal physical and futures trading, could support domestic prices against the London Metal Exchange price. Chinese smelters, who import copper concentrate based on London prices, lose money when Shanghai prices are at a discount to the LME.

As China’s growth slowed to a six-quarter low of 7.4 percent in the first three months, physical prices in Shanghai have been about $275 a ton cheaper than the spot price in London on average this year. Chinese smelters planned to deliver about 150,000 tons of refined copper to bonded warehouses from March 15 to April 15, Wu Yuneng, vice president at Jiangxi Copper Co., China’s largest smelter of the metal, said on March 31.