LONDON London Metal Exchange warehouse companies operating in Antwerp, Belgium, are offering incentives of $100 per tonne to attract copper on to warrant there, sources told AMM sister publication Metal Bulletin.
By doing so, warehouse companies can earn rent on the material while it sits behind or in the queue that has developed there as a result of large cancellations of zinc, lead and steel towards the end of last year.
There were 484,850 tonnes of metal stored in LME-listed warehouses in Antwerp on Feb. 15, about 57 percent of which was held under canceled warrant.
The queue is the third longest in the LME system, behind Detroit and New Orleans. Metal Bulletin calculations suggest that it would take more than 520 working days, or nearly two years, to withdraw metal at the back of the queue in Detroit, where more than 1.1 million tonnes of metal are awaiting withdrawal.
Warehouse companies in New Orleans began offering incentives of $100 per tonne to attract copper into storage last year as the queue swelled there, and sources said warehouses in Antwerp are now following suit (amm.com, Oct. 8).
Nems Ltd., owned by Trafigura Ltd., is the largest operator in Antwerp, while CWT Commodities Pte Ltd., Erus Metals Ltd., Henry Bath & Son Ltd., Metal Terminals International NV, Pacorini Srl and Vollers Belgium NV also have sheds there.
Warehouse incentives have been common in the aluminum market in recent years, but traditionally copper has been perceived as a market that is too tight for the practice to become commonplace. But there is now firm evidence throughout the value chain that a surplus is emerging: treatment charges on concentrates have risen, cathode premiums have fallen and product sales have dropped.
On the LME, copper stocks have almost doubled over the past four months to reach 400,000 tonnes, while the cash-to-three-month spread is in the widest contango seen in two years.
In Europe, Metal Bulletins Rotterdam premium has fallen to $50 per tonne at the low end, down from as much as $100 at the start of the year, making the warehouses incentives attractive to stockholders.
"The physical market has been very quiet and premiums have been under pressure, but now you have a situation where warehouses are willing to pay quite a lot," a copper producer source said. "Warehouses will pay $100, but in the physical market premiums are maybe $60 or $70."
In the aluminum market, physical premiums rose dramatically as consumers were forced to compete with the incentives offered by warehouses, but sources said it is less likely that such an escalation will occur in the copper market, which is half the size and far less oversupplied.
"The thing about the copper marketand the thing that makes it interesting to tradeis that it flips very quickly, and being late to the party can be very painful," an LME Category I broker said.
In the event that warehouse demand is sufficiently strong to absorb the surplus material and consumer demand then rebounds, there will be a swift response in the form of tighter spreads, stronger premiums and higher outright prices. As such, anyone holding material will be encouraged to sell, while warehouses themselves will have less incentive to buy, sources said.
"Warehouses only want to do this in metals where there is a surplus, because then they know the material will be in the warehouse for a long time because it wont be needed," the producer source said. "If there is a surplus coming in copper, and it looks like that might be the case, warehouses will pay high premiums for copper.
"For the moment, consumers wont have to compete because there is plenty of other material around. A lot of spot copper in Europe is Russian material, and that cant go into LME warehouses anyway," he added.
"For the moment, I expect this trade to continue because theres a lot of surplus material around thats got to go somewhere, so well done to the warehouses for taking the initiative," the broker said. "If youve got copper today you can either sell it to a warehouse or carry it through the contango, perhaps making a bit of a return and wait for physical premiums to pick up, but the latter option might take a while."
A version of this article was first published by AMM sister publication Metal Bulletin.