(Reuters) - The contango in the copper market returned for the first time in nine months on Tuesday, as traders braced for another slug of metal to enter warehouses amid increasing gloom about weak demand from China, the world's top consumer.
The cash price on the London Metal Exchange was at a discount of $2 per tonne to three-month on Tuesday, the first cash-to-three-month contango since July last year, according to Thomson Reuters data.
In January, the backwardation with cash prices at a premium to the forward prices was as high as $84 per tonne.
That premium has lured metal into warehouses, easing the perception of tightness even as one investor has kept a tight grip on the lion's share of available metal even as prices sank.
LME-registered stocks have risen for nine straight months to just under 340,000 tonnes, more than doubling in size since the backwardation first emerged last summer.
Now traders are braced for another slug of metal to enter the system in the next month as spot physical demand deteriorates
It's not clear on Tuesday if that dominant position was still in tact.
The most up-to-date LME-dominant position report shows one holder of cash warrant positions equivalent to between 50 percent and 80 percent of open tonnage. That data relates to Friday's positioning.
With the exception of the cash to May spread, the whole forward curve was in contango on Tuesday for the first time in a year, according to traders.
Swings in spreads further forward were particularly violent as investors who were lending out metal closed out positions as the backwardation disappeared.
"Some borrowed positions were washed out today," said Tai Wong, director of metals trading at BMO Capital Markets in New York.
Lending out metal to buy back at a future date is a profitable bet when the market is in backwardation.
The spread between three-month and the average price for 2018 settled in a contango of $71 on Tuesday, compared with a backwardation of $2 on Monday, he said.
Still, the spreads aren't yet wide enough for merchants to start building stocks, like those seen in aluminum over the past five years or more recently in oil during the market's worst crisis in years.
The cost of financing inventory is about 50 cents a day, which means the cash to three contango would need to flare out to $15 per tonne before it would cover costs.