China Copper Backwardation May Persist as Imports Fall

Copper for immediate delivery in China has been more expensive than the metal for future delivery since May 9, and this price structure may persist as imports into the world’s largest user slumped.

The so-called backwardation, signaling limited supplies in the near future, has developed on the Shanghai Futures Exchange, the country’s biggest metals bourse, said Kennedy Zhou, manager at Shanghai Hedge International Trading Co. China’s refined copper imports in June dropped to the lowest level in 10 months as demand for the metal shrank.

“Supply has become tight as importers are sitting on the sidelines now,” Zhou said by phone from Shanghai today. “Given the fact that Chinese copper prices are cheaper than those in the overseas market, importers lose 2-3 percent of the value of every ton of copper they bring in.”

Backwardation occurs when investors who hold short positions, or bets on lower prices, are forced to pay higher prices for metal to cover delivery obligations or renew their bearish bets if less metal is available.

China has cut interest rates twice since early June and lowered the reserve requirement ratio three times since November to bolster growth, which has slowed to a three-year low of 7.6 percent in the second quarter. Copper for August-delivery in Shanghai closed at 55,080 yuan ($8,650) a metric ton today, while the most-actively traded copper for November delivery closed at 54,680 yuan a ton.

Inbound shipments were 250,097 tons in June, compared with 301,990 in May, according to the General Administration of Customs. Exports tumbled to 35,477 tons from 102,375 tons in May, the highest since at least 2008, according to data compiled by Bloomberg.

“The backwardation might persist for a while, until the short-term supply is no longer tight,” said Wu Feng, Shanghai Rising Industry Co.

(Corrects name of exchange in second paragraph in story published yesterday.)
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