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Copper consumers mull contract renegotiations

Keywords: Tags  copper, copper premiums, copper cathode, JPMorgan Chase, BlackRock, spot, contracts, LME London Metal Exchange

NEW YORK — Low copper cathode spot premiums have encouraged consumers to consider renegotiating their 2013 contracts, sources said.

AMM’s spot copper premiums decreased to 4.5 to 5.5 cents per pound on Feb. 12 from 5 to 6 cents previously.

One consumer told AMM that he locked in 2013 contracted material at higher numbers than those available in the spot market currently, putting spot material at a premium of 5 cents per pound.

“We’re seeing some pretty low premiums, and the metal we’ve locked in on annual (contracts) is higher than what’s on offer for spot,” the consumer said. “So we’re looking for opportunities to buy some spot and get out of our contracts, or at least decrease the quantities. If there’s cheaper (metal) out there, why buy the expensive material?”

Legally, the seller with whom the consumer signed the contract must agree to any changes. “We’re working on it,” the consumer said. “We’re looking to pick up a bit (of spot) in the second quarter.”

Contracts allow for consumers to adjust the amount of metal they take each month, and a second consumer told AMM that he’s also considering taking less material on contract in favor of buying spot. However, renegotiating or canceling contracts is difficult, he noted.
A third consumer recalled successfully renegotiating a contract just “once (about) eight to 10 years ago,” and added that he’s not considering trying again this year, as his contracts are reasonably in line with the spot market.

Copper premiums could rise over the next few months, particularly if scrap remains tight and more consumers enter the cathode market, the third consumer said.

“I haven’t seen any price changes related to cathode premiums so far. But if I’m going to the market (because of scrap tightness), I suspect other (consumers) will go to the market, and that activity will raise premiums,” the third consumer added.

In addition, warehouse financing deals are keeping some supply off the market, which could also move premiums north, sources said.

“There’s been a significant amount of tonnage delivered into the warehouses recently, and I’m not sure what the availability will be like. I think there will be a squeeze,” the third consumer said.

The week of March 11, 10,700 tonnes of copper was delivered into LME-registered warehouses in New Orleans. Queues for delivery out of these warehouses have stretched out until the summer of 2014 as the large volume of zinc held there, over 760,000 tonnes, creates a bottleneck.

The warehousing situation could prove troublesome in spring, a period when demand for copper traditionally increases, sources said.

“I’m ... concerned about the warehouses,” the third consumer said. “Historically, demand picks up in the spring. Bottom line, when it warms up, people are out installing more copper.”

Premiums could rise if copper supply can not meet higher demand, he said.
Still, traders said that markets will only feel a squeeze only if demand picks up, and that just hasn’t happened yet.

Demand is “pretty dormant,” one trader said. “There’s a couple of truckloads here and there, but nothing to write home about.”

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