Copper Users Squeezed as Glut Clogs Warehouse Lines: Commodities
At a time when copper stockpiles are rising to the highest in a decade, manufacturers are paying the biggest premiums for the metal in as much as seven years as financing deals lock up supply and extend lines at warehouses.
While inventories tracked by the London Metal Exchange more than doubled in the past year and supplies exceed demand for the first time since 2009, getting copper is becoming more expensive and taking longer. Buyers in Shanghai pay $135 a metric ton more than LME futures, up from $55 last year, Metal Bulletin data show. Luvata Malaysia Bhd., a circuit-board parts maker, stopped buying from local LME stockpiles after waiting times rose to three months from three days at the start of 2012.
Manufacturers may not be reaping all the benefits of the 28 percent slump in prices since they reached a record two years ago because the financing accords are curbing access to metal. As much as 30 percent of LME-tracked reserves are tied up in the agreements, Societe Generale SA estimates. About 84 percent of stockpiles are now concentrated in three locations, lengthening lines just as supply from mines is constrained by disruptions including port strikes in Chile and a landslide in Utah.
“Premiums are up, and they’re up substantially,” said Rodney Kent, chief executive officer of Camden, New York-based International Wire Group Holdings Inc. (ITWG), which had sales of $734 million last year. “You used to be able to clear an order and get an off-take in a matter of days, and now it can be a matter of months.”
Copper for delivery in three months, the LME’s benchmark, fell 7.7 percent to $7,317 a ton this year, entering a bear market in April. Goldman Sachs Group Inc. expects a decline to $7,000 in 12 months. The Standard & Poor’s GSCI (SPGSCI) gauge of 24 commodities dropped 3.7 percent since the start of January as the MSCI All-Country World Index of equities rose 9.6 percent. A Bank of America Corp. index shows Treasuries lost 1 percent.
Global output will rise 4.3 percent to 21.1 million tons this year as demand expands 2.2 percent to 20.9 million tons, Standard Bank Group Ltd. estimates. Supply fell short of consumption in each of the previous three years, according to data from the Lisbon-based International Copper Study Group.
Glencore Xstrata Plc (GLEN), Goldman Sachs, JPMorgan Chase & Co. and Trafigura Beheer BV bought storage companies in 2010, with the acquisitions meaning that they now control more than half of the 700-plus sheds in the LME’s network. Stockpiles tracked by the bourse rose 91 percent to 611,125 tons this year, of which 514,100 tons were held in New Orleans, the Belgian port of Antwerp and Johor, Malaysia.
The three locations stored about 25 percent of LME inventory a year ago. Combined stockpiles excluding New Orleans, Johor and Antwerp are at the lowest since August 2007, compounding the supply crunch for consumers.
Financing typically involves the purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, where prices rise into the future. The transactions are being helped by record-low borrowing costs after central banks cut interest rates to boost economic growth. Three-month copper is about $30 more expensive than metal for immediate delivery, compared with an average discount of $5.44 last year.
Orders to withdraw metal from warehouses rose more than fourfold this year, prolonging waiting times. Assuming that all copper in New Orleans is held by one storage company, it would take at least five months to get metal out, from about two weeks a year ago, according to Macquarie Group Ltd.
Most manufacturers get metal on long-term contracts with suppliers, using LME warehouses to buy metal if needed, said Robin Bhar, an analyst at Societe Generale in London. Luvata Malaysia uses about 30,000 tons a year, and until 2012, 90 percent came direct from annual contracts, said Michael Nordgren, the managing director of the local unit of Brentford, England-based Luvata. Nexans SA (NEX), the Paris-based cable maker that buys 450,000 tons annually, says it gets less than 2 percent from the spot market.
The premium in the U.S. jumped 52 percent in the past year to $176, the highest since 2007, while in Europe it rose 60 percent to $120, the most since 2006, according to data from Metal Bulletin. International Wire Group has seen premiums climb about 25 percent in the past year and the LME’s warehousing system isn’t working for consumers, said Kent.
Premiums were further boosted by supply disruptions such as a landslide in April at the Bingham Canyon mine in Utah and port strikes in Chile, the largest producer. Sterlite Industries (India) Ltd. was ordered in March to shut its copper smelter in south India following a gas leak and Phoenix, Arizona-based Freeport-McMoRan Copper & Gold Inc. (FCX) halted production at its mine in Indonesia in May after a tunnel collapsed.
The LME, bought last year by Hong Kong Exchanges & Clearing Ltd. for $2.2 billion, has sought to ease the congestion by raising the minimum amount that must be delivered by those with the biggest stockpiles. The bourse also added an extra minimum delivery last month for warehouses where orders to withdraw metal exceed a certain threshold.
Warehousing policy is always being reviewed and the LME is monitoring the impact of the changes, Miriam Heywood, a bourse spokeswoman, wrote in an e-mail. Officials from Goldman Sachs, Glencore Xstrata, JPMorgan and Trafigura declined to comment.
The LME has no control over who owns storage companies and the lines at sheds aren’t being formed by those seeking physical supply, Diarmuid O’Hegarty, the bourse’s chief operating officer, told a conference this month in Amsterdam. The exchange’s primary role is as a venue for price setting, not a market of last resort for consumers needing metal, he said.
Rising premiums, stockpiles and extended waiting times are also features of the aluminum and zinc markets. Societe Generale SA estimates that as much as 80 percent of aluminum inventory tracked by the LME, as much as 60 percent of zinc and as much as 50 percent of nickel are tied up in financing agreements.
The expansion in copper stockpiles is most notable in Johor, where sheds now hold 204,500 tons, from 1,425 tons a year ago. Warehouse operators offered incentives to move metal to the port, enticing a flow of cargoes from China, said Sijin Cheng, an analyst at Barclays Plc in Singapore. Daily storage charges are as much as 44 cents a ton, according to the LME, which gets 1.1 percent of the fees.
A group of industrial copper users wrote to the LME in April urging the exchange to ease the congestion. The group, including Southwire Co. and Encore Wire Corp. (WIRE), the two biggest U.S. makers of electrical building wire and cable, is seeking to resolve the issue without legal action, said Robert Bernstein, a partner at New York-based Eaton & Van Winkle LLP, the legal firm representing the companies.
“The main casualties will be the consumers,” said Societe Generale’s Bhar, who’s covered metals markets for about a quarter of a century. “Historically, higher stocks, higher supply would result in lower premiums. But we have circumvented the normal laws of economics.”
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