Copper--Backwardations return to haunt market By Martin Hayes
biz.yahoo.com
Thursday April 16, 12:49 pm Eastern Time
LONDON, April 16 (Reuters) - The spectre of backwardations, or high spot premiums, has returned to the London Metal Exchange (LME) copper market this week, fanned by tightness of physical metal, traders said.
Falling warehouse inventories, delays to shipments in the U.S. and from Russia, and a pick-up in demand have left too many people scrambling for the too few warrants immediately available.
Also, added panic has been caused by Wednesday's massive forward borrowing of metal.
''We've seen this coming for some time...some guys are very short and having to borrow and there is not the metal there,'' a senior trader said.
The physical delays are two-fold. In the U.S. there have been logjams over the last six-to-eight months along the Union Pacific rail lines. These transport copper from the southwest to consumers in the Midwest.
Also, Russian standard cathode for Europe has been held up because of ice, which some said has led to a European refiner to take copper out of the LME's Hamburg warehouse.
There are 36,750 tonnes of copper in Hamburg, but 15,350 tonnes is on cancelled warrant awaiting shipment, and thus unavailable. A month ago there were over 55,000 tonnes of LME copper in Hamburg.
Meanwhile, China has been in the background, but buying direct from merchants and bypassing the LME, for either cathodes, rods, scrap, or concentrates.
''They have been vacuuming the market of anything and everything,'' the senior trader said.
The technical pressure has built up and exploded this week. The LME cash/threes spread, which has been in contango since late-August 1997, whipped into a $6 backwardation on Wednesday.
On Thursday, the backwardation was at $3, while just over a week ago the market was settled in a calm $26 contango.
''Cash to May is still just about financeable ($9 contango), but from June it is really tight,'' one trader pointed out.
Speculative investment fund shorts were caught around the April date last week, and are believed to have rolled forward, with June/July at $12 backwardation.
Other key spread rates are also wickedly in backwardation, notably the three months to December 1998 and to 1999. The latter went from a $5 contango to a $60 backwardation in a few hours on Wednesday. Today, it was trading at $35.
''That was ridiculous - a few brokers all had big orders to borrow and they went in and butchered it,'' another trader said.
Falling stocks, and further declines on the cards, have played their part in the tightness, with LME inventories down 5,450 tonnes today, or 17,175 tonnes so far this week. Total inventory of 309,600 tonnes is the lowest since last September.
''There are a lot of cancelled warrants, and more is being cancelled, which is bullish,'' one trader said.
There were 28,350 tonnes on cancelled warrant today, against 29,275 tonnes on Wednesday. Traders said that the minimal net decline was bullish, as more had actually been cancelled, given the headline 5,450-tonne stock fall.
Some relief is said to be on the way, with around 15,000 tonnes of Chilean copper heading for
Bilbao. But whether this ends up on warrant is open to question, given the demand for metal there.
In the short-term, copper prices are likely to head higher and extend Wednesday's 4-1/2 month highs of $1,883 a tonne, with some traders eyeing $2,000 as forward selling will diminish.
''There needs to be more producer selling, but they are being put off by the spreads,'' one said.
A week ago, December 1999 was around $1,820, at a time when the three months price was at $1,730. Now, despite a rise of some $130 in three months, December 1999 is only $1,825. |
