The premium demanded for immediate copper supplies rose for a second day after a drop in stockpiles monitored by the London Metal Exchange increased concern about the availability of metal.
The cash contract, for delivery in two days, traded at $50 a metric ton more than the benchmark three-month contract by 3:54 p.m. in London. The premium rose as high as $74 on Dec. 1, the most since October 2008. That pricing structure, known as backwardation, indicates concern about near-term supply.
One unidentified company holds 50 percent to 79 percent of the LME-monitored stockpiles, data from the bourse shows. That position appeared on Nov. 19. The three-month contract fell for the next three days. Even at 79 percent of the LME stockpiles, the holding would still only be equal to about 1.4 percent of global refined supply estimated by the International Copper Study Group at 19.28 million tons this year.
The dominant position “is supportive of prices, but I don’t think it’s a major part,” said Kevin Tuohy, a metals trader at MF Global U.K. Ltd. in London. “There is a physical shortage that everyone thinks is going to get worse before it gets better.”
Inventory in warehouses monitored by the bourse declined for a second day, heading for a 42nd consecutive weekly drop. This year’s 30 percent decline in stockpiles, the most since 2004, is compounding anticipated shortages. Demand will outpace supply by 367,500 tons next year, enough for wires, pipes and appliances in about 1.8 million U.S. homes, according to the median forecast of 12 analysts surveyed by Bloomberg last week.
The current situation in copper is “not unusual and the exchange is exercising its well established procedures for maintaining an orderly market,” the LME’s Deputy Chief Executive Officer Diarmuid O’Hegarty said in a comment e-mailed by the exchange. Bourse rules oblige holders of dominant positions in stockpiles to lend metal at fixed rates.
One party last held a position this big in copper for about a month from Nov. 18, 2009, the data show. The cash contract traded at a discount during that period.
JPMorgan Chase & Co. is holding the dominant position in copper, the Daily Telegraph reported on Dec. 3, citing unidentified people.
“As one of the leading firms in base metals and as a Category 1 ring dealing member of the LME, we are expected to make markets for our clients,” said Brian Marchiony, a London-based spokesman for the bank. He declined to comment on specific trading positions.
JPMorgan said in October it planned to introduce a U.S. exchange-traded fund backed by physical copper. BlackRock Inc., the world’s biggest money manager, also announced plans to start such funds. ETF Securities Ltd. said funds backed by metals including copper will start trading in London on Dec. 10.
Dominant positions also exist in other LME metals, bourse data show. One unidentified firm holds 80 percent to 89 percent of the aluminum alloy stockpiles and one party controls 50 percent to 79 percent of the nickel inventory. In tin, one company has 40 percent to 49 percent of the metal and in zinc one firm has 30 percent to 39 percent.
Copper prices on the exchange suggest the dominant position is likely to be closer to 50 percent than 79 percent, said Leon Westgate, a London-based analyst at Standard Bank. The spread between the cash contract and the three-month benchmark would indicate about 180,000 tons of available metal, or about half the 351,375 tons reported today by the LME, he said.
“The LME is very experienced in handling these issues discreetly and efficiently and we have little concern that this current situation will dissolve in the same way as all the others have in the past,” Alex Heath, head of industrial-metals trading at Royal Bank of Canada Europe Ltd. in London, wrote in a report.