Copper market on alert for LME inventory influx amid China probe

Thousands of tonnes of "invisible" copper now being hurriedly ushered out of some Chinese warehouses may remain out of sight for months longer, as banks and traders seeking safer havens for their metal opt out of the London Metal Exchange network.

The fear of fraudulent financing at some storage depots in Qingdao port has prompted some banks and merchants to cut credit for financing deals or relocate metal to better-known warehousing firms, including some in South Korea and elsewhere that are part of the LME's vast system. 

The shift away from China's opaque warehouses fueled concern among traders of a potential rise in stockpiles warranted in the LME network, data that would likely add pressure to sliding prices. As much as 300,000 tonnes of copper, nearly twice the entire inventory held in the LME's global warehouses, could be released by September, according to analysts at Macquarie.

But it is far from certain how much, if any, of that metal will appear in the LME's daily tallies, say some market sources familiar with the complex financing deals that have ballooned with China's loose access to credit.

Some of the metal is staying in China, moved to warehouses owned directly by operators, rather than rented by third-parties, say people involved in the market. That would be enough to placate companies worried about whether their stocks have also been pledged as collateral on another loan. [ID:nL4N0OS3S7]

Alternatively, it may still get sent abroad but to sheds run by exchange-approved companies in "off warrant" storage outside of the LME's official accounting system, some said - ensuring it is safe and secure but not necessarily deliverable.

The uncertainty over how much metal is being moved, and where it will end up, is the subject of frenzied speculation as banks scramble to assess their exposure to the alleged fraud, which has roiled the global copper market over the past week.

"The unwinding of these deals may impact the price, but it's not as easy as saying the market's panicking and the metal will

(reappear in the LME system)," said a source familiar with these types of deals.

TO WARRANT OR NOT TO WARRANT

The size of unreported copper stockpiles in China has been a source of mystery and confusion for years, particularly as the country's booming credit market has created pent-up demand for metal imports as collateral against loans.

That has bolstered prices and tightened supply. LME stocks are below 170,000 tonnes for the first time since 2008 and cash prices were as much as $100 higher than forward prices last month.

The threat of an influx of copper into LME warehouses almost wiped out the cash-to-three-month backwardation on the LME last week. Prices could fall back as low as $6,500 per tonne, Macquarie analysts said. Three-month prices closed at $6,690 per tonne on Wednesday.

On Wednesday, Macquarie analysts estimated that almost 300,000 tonnes of copper could be released from bonded storage in China by September. But they expect another 600,000 tonnes of copper to remain in place, with the allure of easy lending overcoming rising concerns about counterparty risk.

"Large and well-established importers have been seen to survive previous crackdowns and we expect they will again," Macquarie said.

The flow will be at its highest this month with some 110,000 tonnes of metal leaving bonded storage, easing to 90,000 in July and 90,000 tonnes over August and September.

The LME's electronic system for monitoring ownership of warrants, or receipt of ownership, make its network an attractive destination for banks and traders shaken by the probe. About 700 storage facilities operate in 38 locations in its global network, which stretches from the Detroit in the United States to Singapore.

But the LME has not been allowed to operate in China, and the costs of shipping metal outside of China and higher rent charged by LME-approved warehouses may offset some banks and traders' flight to perceived safety in the LME network.

At the same time, metal locked up in so-called repo deals, which give companies access to short-term credit in exchange for goods and a mainstay of China's copper market, would logically stay in China.

So far, there is no sign of the metal's showing up. LME stocks have fallen by 2,000 tonnes since Reuters first reported on the Qingdao crackdown on June 2.

Nervous traders are watching the daily data closely.

"Fundamentally, nothing's changed if you look at the stock numbers," said a London-based LME futures trader. "If Chinese metal appears on warrant, it's a different matter."

Rusal Indicates Bullish Trends in Aluminium Sector

Global aluminium producer Rusal indicated bullish trends in the light metal, mentioned several influential factors that have emerged in recent weeks. Major Four of them are depicted below:

Imbalance in Supply Demand

Aluminium Giant Rusal said that the global aluminium market was forecasted to meet a deficit of about 1.2million tonne in 2014 and an additional 985,000 tonnes in the next year. They also included that there would be expansion in several sites of Rusal. The company added that the beyond 2015, they were seeing a limited opportunities for adding capacity outside China as no new projects were in the drawing board for imminent development and the industry would remain under invested.

The supplier said that within China the demand in 2013 of about 25.5 million tonnes was roughly equal to the production and will grow about 10 percent in 2014. Estimated capacity addition of 2.4 million tonne introduced in the year 2014 had been counterbalanced by the closure of 2.1 million tonnes of capacity due to the uneconomic plant operations. Top of Form

Indonesian ore export ban

Rusal reported that the rally in nickel prices as a part of Indonesian ore export had caused investors to reconsider the effects of reduced Indonesian exports of bauxite in the light metal industry.  Above 4 million tonnes of bauxite was shipped to china from Indonesia each month in the year 2013, which made the basis of 10 million tonnes of aluminium production per annum i.e. about 20 percent of global production.  But it was just 4 million tonnes so far this year. Thus it is inevitable to seek any alternative source for lower grade, high costs of bauxite to maintain the production of alumina as same as previous years.  They are even considering that refineries in China may reserve the stocks for nine months’ metal supply.

Stock Trends

Rusal said that the stock trends of 2014 also supported a significant deficit in the market. LME stocks have decreased by more than 260,000 tonnes since the year start, lowest level in the last 13 months. The on-warrant level is at the lowest level in five years. Deliveries of aluminium from the bonded warehouses are down all over the world. But, Rusal believes that there is no demand for additional metal of warehouse in the market which is in deficit condition.

The company added that the stock trends have also changes considerable in the last 12 months with cancelled warrants, which represents 55 percent of all LME stocks. Rusal said that In Vlissingen and Detroit cancelled warrants represent 72% and 88% respectively, which shows a growing demand for aluminium above and beyond the  supplies from the smelters, to both the US and Europe

Price dynamics

Rusal said that the present trading activities for the light metal can be taken as a support for the aluminium sector in the short term basis. They explained that while taking a closer look at the trading in the last three day, the technical resistance was very strong of about US$ 1,850 per tonne and that is a part of long term done trading trend that was last testing in April at about $US$ 1,900 per tonne.

In the last few days the market was supporting twice at US$1,840 per tonne. During last Friday, as the prices moved through US$1,850 per tonne, stops were activated that initiated considerable trading volume, which covers both the previous short positions and new longs creation. This made the market to enter into a very constructive phase. What’s more, the availability of free float and zero premium warrants has decrease by 50 percent since the year start, about 730,000 tonnes. This resulted in a great impact on the liquidity of warrants for short term settlements.

In conclusion, Rusal, the aluminium giant believes that the combination both physical and constructive pricing factors see aluminium entering into  new bullish phase that could indicate prices tested at about US$ 1,900 per tonne this week and US$2,000/t  in the coming few months.

Freeport, Newmont CEOs in Indonesia in bid to break export tax deadlock

The chief executives of Freeport McMoRan Copper & Gold Inc and Newmont Mining Corp are both in Indonesia's capital, marking what might be a last-ditch effort to resolve a dispute over a mineral export tax before a new administration takes over in October.

Richard Adkerson, the CEO of U.S.-based Freeport, was in Jakarta again less than a week after talks with Indonesia's new chief economics minister failed to make a major breakthrough on an escalating export tax that has halted copper concentrate shipments since January. [ID:nL3N0OL1D8]

"Yes he is," Freeport spokeswoman Daisy Primayant said in a text message on Thursday, when asked whether Adkerson was back in Jakarta. She did not elaborate.

Newmont CEO Gary Goldberg, who was not involved in last week's talks, was in the capital to "demonstrate the company's seriousness in supporting the government's policy to increase domestic smelting", spokesman Omar Jabara said in an email.

He said Goldberg hopes to meet with "several government officials".

Indonesia's chief economics minister and billionaire businessman, Chairul Tanjung, is spearheading a new government push aimed at brokering a deal with foreign miners to restart copper concentrate exports that halted five months ago. [ID:nL3N0OJ12N]

Both Freeport and fellow U.S.-based copper and gold miner Newmont have previously argued they should be exempt from the tax, which kicks in at 25 percent and rises to 60 percent in the second half of 2016, before a total concentrate export ban in 2017. They say their current contracts prohibit any extra taxes.

The export tax is part of a government drive to force miners to build smelters and processing plants in Southeast Asia's largest economy, but a lack of progress in resolving the stalemate last week led to Newmont declaring force majeure.

Although government officials have said Freeport has agreed to pay the tax, with the percentage tied to progress made in smelter construction, the extension of the Arizona-based miner's contract beyond 2021 appears to now be a stumbling block.

While Freeport says it needs the certainty of a contract extension before investing more than $15 billion to turn its Grasberg complex into an underground mine when open-pit activities end after 2016, the outgoing government says it cannot legally do this.

Government officials have previously said Freeport can only renew their 2021 deal in 2019 at the earliest.

"The government at the moment has no right to extend Freeport's contract that ends in 2021," Tanjung told reporters on Thursday. "Freeport has asked for that extension but ... the current government doesn't have the right."

The government has consulted legal experts to see whether there is room for manoeuvre on the 2019 contract stipulation, and has proposed signing a legally binding MoU with Freeport to bypass the contract extension issue.

Indonesia holds a presidential election on July 9, with a new administration set to take office in October. Current President Susilo Bambang Yudhoyono has served the maximum two terms.

Nifty 7720/7700 or 7570 level

Global Death Cross Accelerates As World Bank Slashes Growth

The World Bank joined the hallowed ranks of the IMF and admitted it was clueless last night, slashing growth estimates for every developed and developing nation from Brazil to the US. The "bumpy start" as they called it merely exacerbated what is now becoming a dismal joke as the death cross of GDP growth expectations and world stock market valuations diverge in an ever more fragile manner.

And this after JPMorgan slashed US expectations...

China construction vs copper price – something's gotta give

Chinese copper imports tumbled 16% in May.

Year to date China is still importing refined copper at a record setting pace – up a whopping 34% over 2013 to 2.1 million tonnes.

This at a time when the Chinese economy is expanding at is slowest pace in more than two decades.

The mismatch is ascribed to the popularity in credit-starved China of the red metal as collateral in trade financing agreements.

But May's sharp drop indicates these deals may be unwinding at a more rapid rate than previously thought.

With all the focus on the unwinding of China's metal-backed loans, it's easy to lose sight of copper's ugly demand fundamentals

As part of its efforts to rein in the country's vast shadow banking system, Beijing has been clamping down on the practice.

At the same time a weakening yuan – another deliberate policy – has pushed many of these arrangements under water.

Last week's revelation that authorities are probing whether traders at the port of Qingdao pledged the same copper, iron ore and aluminum inventories as collateral for loans multiple times to different banks, could turn what has been an orderly exit into a stampede.

With all the focus on the collateralised loan business it is easy to lose sight of the fundamentals of the copper trade.

Unfortunately here the outlook is no rosier.

Capital Economics in a research note points out that construction and infrastructure typically account for nearly 60% of China’s copper usage and while Beijing is providing some support to these sectors through its affordable housing programme and expansion of the electricity grid, "the bigger picture is of weakness in the metals-intensive construction sector."

The close correlation between the copper price and the building sector is clear from this chart.

But early on in 2014 this relationship broke down.

And the most likely scenario of how this link will be restored is not a sudden building boom (Beijing is very wary of any economic stimulus), but a sharp correction in the price of copper.

MCX-Copper – Sell on rallies

The copper futures contract traded on the Multi Commodity Exchange has dropped sharply over 3 per cent in the past week.

Concerns that a private company in China could have pledged copper multiple times as collateral for loans has triggered this fall.

This is adding further pressure to copper that had earlier tumbled after China, the world’s largest consumer of the metal, witnessed its first domestic corporate default in March.

The MCX-copper futures contract has declined below its key short-term support level of ₹404/kg.

The outlook is bearish since the sharp fall in the past week has happened after many failed attempts to break above the 200-week moving average resistance, at ₹420.

Though the contract is reversing higher from the low of ₹394.55 recorded on Monday, the upside could be limited.

Key short-term resistance is available in ₹404-405 zone. Fresh selling interest can emerge in this resistance zone.

Short-term traders can wait for an intermediate rally and initiate fresh short position at ₹403. Stop-loss can be kept at ₹408 for the target of ₹395.

Key support for the contract is at ₹393.

There is a high probability for the MCX-copper contract to reverse higher from the support level ₹393 in the later stage.