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SPOTLIGHT: Copper backwardations here to stay; warrant cancellations rocket


The backwardations across the copper spreads on the London Metal Exchange are likely to remain in place for the foreseeable future, according to traders, meaning that market participants must grapple with a new trading environment at least for the time being.

The red metal settled at a three-month price of $8,200/05 per tonne on Wednesday April 25, as short covering began to take hold on the market. Prices had slipped below $8,000 per tonne earlier in the week and had threatened to fall further.

A number of market participants have now said they believe the short covering is coming from China, as their positions are squeezed.

“We’ve seen so much two-way business out of China today that it’s difficult to see who has been squeezed and who hasn’t. I’ve no doubt that [Chinese shorts] are a part of the game,” an LME broker said.

“There’s liquidity and that’s helpful. Inevitably we have been burned with some clients, but equally we’ve made money. When there is volatility and a backwardation you have the ability to charge more for the luxury of quoting.”

Stocks of copper have been falling progressively over the course of the last few weeks and were down another 475 tonnes in LME-listed warehouses on Wednesday to 256,400 tonnes.

“You can’t finance warrants and you can’t borrow the spreads because it’s too expensive. So finance deals become very difficult,” another broker said.

Cancelled copper warrants have also been at record highs, with some market participants suggesting they are at their highest levels for eight years. On Wednesday, cancelled warrants hit 108,175 tonnes in LME sheds, up about 7,500 tonnes compared with Tuesday.

“Given the scale of the recent warrant cancellations, it does look like the backwardation in the nearby spreads is likely to be around for a while,” Standard Bank analysts said in a note.

“Looking at historical patterns, the cash-to-three month spread is behaving in line with historical norms, given the current level of on-warrant LME stocks.”

Behind this, they said, is the possibility that the market is now anticipating a certain amount of stock relocation from Shanghai-bonded warehouses to LME sheds over the coming few weeks.

“Looking ahead, with China looking forward to a four-day May Day holiday weekend, [activity] may well diminish during Asian trade [heading] into the weekend, as participants pare back positions,” Standard Bank said.

The backwardations, meanwhile, have led traders to move copper positions forward, a category I trader said earlier on Wednesday.

This could be dangerous for the market, as it will become increasingly difficult to put a limit on the backwardations, he said.

“When you get to the April dates, people move their positions forward for a week or a month or whatever,” the trader said.

“As long as the stocks are as low as they are, this is going to keep happening, especially if the price dips, as some predict, to $7,400. These backwardations are going to be around for some time to come.”

The only way to soften or get rid of these backwardations will be to move metal from non-LME locations to LME locations, he said.

“People are just thinking: ‘if I move [my position] for a week, it will be ok’. So many people are joining in. People are borrowing because it’s going to get worse,” the trader said.

A second category I trader told Metal Bulletin on Wednesday that there has been a negative arbitrage between Shanghai and London for months.

“There has been quite a lot of selling LME and buying SHFE [on copper] for the last two months because of the negative arbitrage between the SHFE and the LME,” a category I trader said.

“Quite a lot of Chinese clients are bearish with the market, so they are continually rolling their price-fixing period to a further forward [date] with the seller,” he added.

April-July copper was holding at a $90 backwardation at 13:34 BST on Wednesday, and May-July spreads showed a backwardation of $55 as of 12:58 BST, while tom-next spreads remained in a contango of just $1.

“There are so many reasons behind it. I don’t think you can pinpoint just one. We have some people who have sold copper at higher levels, and some who have sold against mining [stocks],” the first category I trader said.

“It’s not difficult to get hold of copper but it’s in the wrong place. There are very small stocks on the LME. When these things happen, you always get someone trying to make more money out of it.”

Claire Hack
Twitter: @clairehack_mb

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