SANTIAGO, Chile Physical copper premiums dont reflect market fundamentals, an indication that "the copper value chain is broken," according to Luvata vice president of metals Ian Scarlett.
"We would like premiums to reflect the business environment supply-demand cycles and not to be complicated by structural games," he said at the Center for Copper and Mining Studies annual Cesco Week in Santiago. "At a time of increasing surplus, were seeing material being restricted and premiums increasing, which is not logical."
Queues to get copper out of warehouses have grown as material has flowed into storage, attracted by paid incentives and locked away in financing deals. At the same time, premiums have shot higher, particularly at the three major storage locations of Antwerp, Belgium; Johor, Malaysia; and New Orleans.
"Instead of being the market of last resort, (London Metal Exchange) warehouses become the market maker themselves," Scarlett, who is on the LMEs copper committee, said.
The LME is a great institution, but has "fallen asleep" on the issue of warehousing, he said.
"Im certain the exchanges new owner and current team are smart and energetic enough to put the energy into sorting it out," Scarlett said, referring to Hong Kong Exchanges & Clearing Ltd., which acquired the LME last year. "The new owner has paid a lot of money for the LME and has a vested interest in it not having a credibility problem. They themselves have recognized the warehousing issues."
London-based Luvata has "more and more things to consider when were trying to source material for our factories, and this is making things hard," he said. "Customers are not easily accepting they have to pay more, either."
Separate load-out rates for individual metals could be one solution to the warehouse queues, Scarlett added.