LME ASIA WEEK 2019: Shanghai Cu premiums remain weak, but less volatile following Tewoo financial woes

Copper premiums in Shanghai have become less volatile due to there being less financing demand in the market after one of China’s largest copper importers, Tewoo Group, began experiencing liquidity troubles in late March.

Tewoo was a hot topic of discussion among delegates attending LME Asia Week in Hong Kong this week, with participants noting the possibility of a more favorable arbitrage developing between London and Shanghai and greater volumes of the red metal being delivered into London Metal Exchange warehouses as a result of the importer’s financial woes.

Tewoo’s troubles
Tianjin-based Tewoo defaulted its debt with banks at the end of March, causing the company’s credit line for importing metal to be suspended and forcing it to liquidate its roughly 100,000 tonnes of copper stocks.

By mid-April, Tewoo had offloaded around 100,000 tonnes of copper cathode in the Shanghai-bonded zone to five companies at below-market rates, ranging from a discount of $10 per tonne to a premium of $20 per tonne against the LME copper price, delegates said on the sidelines of LME Asia Week on Monday May 6.

In contrast, Fastmarkets MB assessed the Shanghai-bonded copper premium at $40-65 per tonne on April 15.

A large privately owned Chinese trader is believed to have acquired 30,000-50,000 tonnes of this Tewoo material in early April, according to delegates at LME Asia Week. Delegates were unwilling to name the companies they thought had bought Tewoo’s cathode and also said it was difficult to confirm an exact amount that each company had acquired.

More than 10,000 tonnes of copper cathode from Taewoo’s approximate 100,000 tonnes have entered the physical market in Shanghai because a considerable profit can be made on the material due to the lower-than-market rate paid for it, market participants told Fastmarkets MB.

The remaining 90,000 tonnes are still in the bonded zone while the owners await more favorable arbitrage conditions before importing into the domestic market, they added.

Tewoo did not respond to requests for comment at the time of writing.

Shanghai copper market less volatile but still soft

Thin demand in the cif Shanghai copper market after Tewoo’s financial troubles has kept premiums there depressed at two-year lows, but at the same time, growing pessimism in the market is capping any volatility.

Copper traders are shrugging off the slightly more favorable import arbitrage for bringing cathode from London to Shanghai, maintaining a limited appetite for import business at the moment.

Importers stood to lose an average of $74.53 for each tonne of copper cathode brought into China during April, compared with a loss of $155.46 per tonne in March, according to Fastmarkets MB’s calculations.

But these narrower losses seen in recent weeks have failed to provide much support to cif Shanghai premiums for grade A copper cathode.

Fastmarkets MB assessed the premium for grade A copper cathode at $38-60 per tonne basis cif Shanghai on May 3, unchanged since April 23 but down from $55-72 per tonne at the start of the year. The May 3 assessment marks the lowest level since April 2017.

Similarly, the premium for bonded material is also hovering near two-year lows; Fastmarkets MB assessed the premium for grade A copper cathode in the Shanghai-bonded zone at $38-62 per tonne on May 3, also unchanged from April 23 but down from $57-76 per tonne on January 2 – the first trading day of the year. The premium was last assessed at a similar level in April 2017.

With Tewoo’s credit line suspended, there has been less financing demand for copper in Shanghai and this has stifled traders’ buying appetite since April, market participants said.

Using copper as collateral in financing deals was previously a major driver of copper demand in China and Tewoo was one such company that imported copper for this reason.

“For financing activities, traders can stand to lose around 500 yuan per tonne by bringing copper into China,” a senior analyst told Fastmarkets MB on the sidelines of LME Asia Week.

“But if it is not for financing purposes, traders will only show interest [in bringing metal into China] when there is an import profit. In other words, only when the arbitrage window between London and Shanghai is open,” the analyst added.

“Sparse deals can be heard after Tewoo’s credit line for importing metals suspended by banks,” a trader source told Fastmarkets MB on May 6.

“At the moment, the cif Shanghai market for copper cathode has lost a major buyer,” a second trader source said. “Tewoo is a top importer who used to purchase from both the Shanghai cif and bonded markets from time to time before its credit line was suspended.”

More metal likely to enter LME warehouses
Tewoo’s inability to import copper cathode as it did previously is very likely to result in a greater amount of metal being delivered into LME warehouses, delegates at LME Week Asia said on May 6.

This would also likely cause import losses on importing copper from London to Shanghai to shrink in the long term, they added.

If Tewoo cannot get its credit line extended, some foreign seaborne cargoes which have been booked on long-term contracts may have to be diverted to other Asian regions or possibly delivered into LME warehouses, a Shenzhen-based analyst attending LME Week Asia said.

A greater number of cargoes being delivered into LME warehouses would pressure the LME copper price, the Shenzhen-based analyst added.

At the same time, China’s appetite for imported copper cathode may decline and this would lift domestic copper prices in the country, a third analyst noted.

“The much less import volume could help make the import loss for bringing copper into China from London less,” the third analyst added.

Previously, Tewoo imported between 70,000-80,000 tonnes of refined copper per month, equivalent to almost one million tonnes of cathode annually, accounting for 20-25% of total Chinese refined copper imports.

“$38 [per tonne] should be a floor price for buying copper cathode cif Shanghai because traders are willing to deliver against LME warehouses rather than sell when premiums are at this level,” a fourth analyst said.

That said, traders may be hesitant to buy at this level because they are unsure when premiums will pick up again, the fourth analyst added.

What to read next
US President Joe Biden will increase tariffs on Chinese imports including steel and aluminium, electric vehicles, semiconductors and advanced batteries, to counteract China’s “unfair” trading practices, he announced on Tuesday May 14
Anglo American's rejection of takeover bids by BHP has put copper firmly under the spotlight, but what challenges lie ahead for the red metal as the corporate tussle continues?
Copper fabricators in China and the wider Southeast Asian region continue to feel the pain of high copper prices on futures exchanges and a lack of new orderbooks, with some having already asked for a postponing of shipments of long-term copper cathodes, sources told Fastmarkets in the week to Wednesday May 15
Recent weeks have seen a significant number of miners agreeing sales of copper concentrate to traders for one to four years of supply, Fastmarkets has learned
The copper market is facing a historical moment with Chinese smelters now paying premiums for raw material copper concentrate while selling their finished product at a discount, but participants point to easing concentrate demand in the second quarter as supportive for the market
The new tariffs on aluminium imports imposed by Mexico are affecting the light metal's supply chain, trade flows and premiums, sources told Fastmarkets during the week to Friday May 3.