Copper is probably being used in more financing transactions, leading to reduced supplies of the metal in warehouses monitored by the London Metal Exchange, Macquarie Group Ltd. said.
LME-monitored stockpiles of the metal have dropped 38 percent this year to 230,625 metric tons, the lowest since October 2008, according to exchange data.
Copper used in financings when there is a shortage of metal is “rare,” Macquarie said in a report dated today.
“In theory, copper financing shouldn’t work, however it appears that such trades have occurred,” Ryan Belshaw, an analyst at Macquarie in London, said in the report. The decreasing availability of copper on the LME “is now being driven by a large increase in copper being financed in off-exchange warehouses.”
Financings of the metal outside the LME warehouse network will probably keep premiums of the metal over the LME price “high” outside of China, Belshaw said. “We expect the financing deals are unlikely to continue beyond the fourth quarter.”
Traders are able to make a profit from financings because metal is selling at a premium over LME prices and metal can be sold and bought back later at a lower price, according to Macquarie. The price of copper for immediate delivery was $78.50 a ton higher than the metal for delivery in three months on May 4, LME data on Bloomberg show.
Financings are common in aluminum and zinc because both markets are in surplus, allowing traders to make a profit by buying metal and selling it later at a higher price that compensates for the cost of finance, storage and insurance, Macquarie said.