SANTIAGO, Chile Incentivizing coppers movement into London Metal Exchange warehouses for financing deals is unhealthy and doesnt reflect the underlying market fundamentals, Corporación Nacional del Cobre de Chile (Codelco) president and chief executive officer Thomas Keller Lippold said.
While producers might see short-term benefits in higher premiums, delays in accessing material in warehouses due to long queues are also not a healthy situation.
"In the longer term, I dont think its a good thing for the industry that there are quasi-artificial incentives that dont let the underlying market conditions fully express themselves in terms of prices," he told AMM. "Its not very healthy that it takes four to five months to take material out of the marketthat is not a reflection of a well-functioning market."
New Orleans, Antwerp, Belgium, and Johor, Malaysia, are the main warehouse locations offering incentives to attract metal into storage, with stocks soaring as a result.
"Certain factors are influencing the decisions to lodge material into the warehouses which dont necessarily relate to the supply-demand balance," the Codelco chief said.
"Its the combination of three factors: we have a market contango, very low interest rates and there are strong incentives to bring material into the warehouses. So quite frankly, I think the increase in official warehouse stocks not only reflects a supply-demand balance but also the combination of these factors, which clearly provide an incentive to stock material in warehouses," he added.
Codelco sees copper in a small surplus for 2013, but the impact of increased supplies on prices has been "relatively minor, as expected," he said. "Were, therefore, not particularly worried."
That stock rise will continue in 2014, but still in a way that wont cause a price collapse.
But in contrast to LME stocks, which rose by about 250,000 tonnes in the first quarter, stocks held in bonded warehouses in China are declining as the country works through its store of metal, the Codelco executive said.
"Its pretty much a fact that there has been a decline (in bonded stocks), albeit not to compensate for what we have seen in terms of stock increases in LME warehouses. All in all, the market is developing as expected, with not too many surprises," he said.
Codelco anticipates 5- to 6-percent growth in Chinese refined copper demand this year, with U.S. growth also showing an encouraging risealbeit at a much slower pace.
"Weve increased our sales in the USA in the first quarter, reflecting our sales campaign last year, so weve witnessed an increase in demandalbeit a small one. Maybe the USA got slightly ahead of itself, but the fundamentals of the U.S. economy are very sound, especially with the prospects for the manufacturing sector, shale gas, and so on," he said, adding that Europe remains "problematic" in contrast.
"One week you have some good news, the next week you have bad news, so its a roller coaster still in that part of the world. Im more encouraged about whats happening in the USA."