The prospect of war in the region has made the financing of metal too risky from a compliance perspective, with basic insurance not able to cover “acts of war” or “terrorism”, a banking source said.
Some of the world’s leading banks for metal financing have come under pressure to unwind positions, particularly on the large amounts of aluminium stored off-warrant in the region, and are simply not rolling any existing deals, Metal Bulletin understands.
But this also affects those parties that were receiving credit lines to hold LME warrants in the region. Those unable to secure financing are pushing warrants back onto the system, sources added.
On the large amounts of off-warrant material, particularly aluminium, Metal Bulletin also understands that some of this metal is now either being moved or alternative financing methods are being sought.
“There’s still a couple out there willing to do the deal but for us and quite a few others it’s just too risky,” a banking source said on the sidelines of Metal Bulletin’s International Aluminium conference in Bahrain.
Cif Korea aluminium premiums are unchanged from a week ago at $75-90 per tonne while warrants are stable at $5-20 per tonne. Copper warrants are also unchanged at $5-10 per tonne while cif Korea copper is stable at $60-65 per tonne.
Tensions on the Korean peninsula have been growing while US President Donald Trump and the North Korean administration exchange heated rhetoric over the latter’s ramp-up of its nuclear programme.
Since Wednesday September 13, 68,350 tonnes of copper have been warranted in South Korean LME-listed warehouses, while 47,450 tonnes have been loaded onto the exchange.
The heightened Korean tensions have also contributed to the widening contango in nearby copper spreads on the LME, with the cash/three-months spread recently at a $52 per tonne contango.
Traders are averse to holding copper warrants, 33% of which are held in South Korea, for fear that they will not be able to finance them in the current climate.
Barring spikes in May 2014, August 2012 and August 2010, spreads have not been this positive on future prices since 2008.
“It’s like a hot potato. [Warrants] just get passed along until someone takes it and that’s why the spreads are pushed out… because people don’t want to hold the warrants so they sell nearby and buy the future,” a copper trader told Metal Bulletin, adding that spreads should narrow if tensions ease.
Three-month LME copper prices have come under downward pressure, falling to $6,421 per tonne today, while three-month aluminium traded at $2,126 per tonne as of 6pm UK time.