By Nick Trevethan
Singapore - The arbitrage window that allows profitable imports of copper from the international market into China snapped shut on Thursday as the gap between Shanghai and London markets narrowed sharply.
The premium for Shanghai's third-month copper contract above the benchmark London Metal Exchange prices, including China's 17 percent VAT, narrowed to 8 yuan from almost 600 yuan on Wednesday, and close to 1 000 yuan in mid-January.
"A significant part of the copper leaving the London Metal Exchange is going to China," a trader in Singapore said. "Warrants are not that easy to get hold of, so people will grab them wherever they can."
The rush to get metal to China has resulted in the first sustained declines in London Metal Exchange stocks of copper since October 2008.
Since peaking at 548 000 tons in late February 2008, stocks have fallen 22 000 tons or four percent, while the level of cancelled warrants - metal tagged for removal from London Metal Exchange warehouses - has ballooned to 12 percent of the total stockpile.
In the short term, the flood of copper into China, which hit a record 211 527 tonnes in December 2008, would continue as cargoes have already been booked.
But if the window remains shut for a while, imports would slow, removing a major pillar of support from the international market.
"The arbitrage has narrowed a lot and that might cause some people to think twice about importing. When Shanghai broke above 30 000 yuan, it got a little ahead of itself and the arbitrage window might shut for a while," a dealer in Shanghai said.
Shanghai copper for delivery in May rose 260 yuan, or 0.9 percent, to 29 500 yuan at the close on Thursday, off an earlier four-month high of 30 600 yuan.
London Metal Exchange copper fell $45 to $3 700. On Wednesday, copper hit $3 785, its highest since November 27, scoring its biggest daily rise in six weeks.
"It won't have much effect on China's imports in the short term, but in the longer term there will be. A lot of people were interested in buying in April and May. Now they are less interested in April, and very few will buy for May," said a Shanghai-based trader.
"The decline of London Metal Exchange stocks will slow down as a result."
Half the available copper stock in Asia and 10 percent of the material in Europe is earmarked for delivery and many in the market believe the drawdown in the past week or two is the result of the arbitrage opportunity.
"Shanghai had a strong day on Wednesday and this might just be profit taking and the arbitrage could re-establish," said William Adams, an analyst at BaseMetals.com.
"With cancelled warrants up at these levels the outflow should be maintained in the short term. But for it to continue in the longer term, the arbitrage will have to widen again and attract more imports by China." - Reuters