The dominant holding of copper stockpiles by one company is “adding fuel to the fire” of limited supplies with traders betting on lower prices, according to Galena Asset Management Ltd., the London-based unit of commodity trader Trafigura Group.
Inventories of the metal in warehouses monitored by the London Metal Exchange fell 38 percent this year to the lowest since October 2008. Two companies held 40 to 49 percent of copper stocks and positions expiring in three days as of May 2, with a dominant holding of 50 percent or more seen for all of April except four days, according to an LME report used to apply lending guidelines. Traders betting on lower prices are short.
“It would appear the market is generally short and also there seems to be no significant liquidity or inventory around,” Jeremy Weir, chief executive officer of Galena, said in an interview in Lausanne, Switzerland. “Stocks seem to be fairly tight, but they seem to be fairly well held, so that’s adding fuel to the fire.”
Copper for immediate delivery on April 30 traded at $155 a metric ton higher than the contract for delivery in three months on the LME, the widest so-called backwardation since August 2008. The backwardation this year first appeared in February. The premium was $55.50 a ton yesterday.
Backwardation should encourage buying of later dated contracts, which is positive for prices, Weir said in the interview on April 25. “Spread tightness does not necessarily result in higher prices as might naturally be assumed,” he said. “It does, however, provide some support as roll costs to become negative which, if persistent, force shorts to cover.” That means traders who are short buy back contracts to reduce their losses if prices are going up. Copper has climbed 8.6 percent this year.
About 32 percent of the LME-monitored stockpiles are due to leave warehouses, with canceled warrants last week at the highest since March 2004. Traders holding short futures positions are getting “squeezed” because they have to pay premiums to get out of their positions or to keep them active, Robin Bhar, an analyst at Societe Generale SA, said in a report April 27. “Much, if not all, of the available copper stock sitting in LME warehouses is believed to be tightly held,” he said. The price investors pay to borrow the metal for one day traded at $14 a ton today after climbing to $30 a ton on May 2, according to LME data.
“Some investors have been lulled into a false sense of security that you’ll always have a contango,” Weir said, referring to a market situation when the nearest contract is cheaper than later ones.