China importers may cut LME deliveries as copper premiums weaken

Reuters

* Spot copper premiums fall a quarter to $150 over LME cash

* Premiums seen falling further as China supplies rise

* Aug arrivals seen at 300,000 T, Sept expected higher -trade

By Polly Yam

HONG KONG, Aug 30 (Reuters) - Chinese buyers may cutpreviously booked London Metal Exchange (LME) refined copperstocks over coming months as arrivals into the world's topconsumer of the metal have built up inventories and weighed onspot premiums, traders said on Friday.

Fewer shipments into China would mean more supply on theinternational markets, which could blunt a rebound in prices.London copper is still down nearly 10 percent on theyear, but is up more than $500 from a low hit in June.

Chinese importers have queued up to take LME stocks ofcopper bought in June, when price differentials between Shanghaiand London were favourable for imports. They mostly paidpremiums of about $150-$160 a tonne over cash LME prices.

The importers had planned to cash in as premiums later roseto four-year highs of above $200. But spot premiums have sincefallen back to about $150 a tonne and are expected to fall to$100-$130 in the coming two months, traders said.

"People are expecting premiums to fall and have beenunwilling to buy mostly in the past two weeks," a trader at alarge Chinese trading house said, referring to copper stocks inbonded warehouses in Shanghai.

He said the arbitrage window had been mostly closed thismonth, prompting some importers to store copper arrivals inbonded warehouses, instead of paying the value-added tax and reselling into the domestic market as previously planned.

The bulk of the earlier orders were scheduled to arrive inChina between July and October, leading to the rising inventory.

China's arrivals of refined copper were estimated at 300,000to 350,000 tonnes for August, with imports likely to increase toabout 400,000 tonnes in September, traders said. Arrivalsincluded both spot and term shipments delivered from LMEwarehouses and global producers.

Refined copper arrivals rose 5 percent in July from theprevious month, hitting a 10-month high of 291,846 tonnes,official data showed.

Copper in bonded warehouses in Shanghai rose to about400,000-460,000 tonnes, from around 370,000 tonnes in late July,traders estimated. Stocks were still less than half of a recordone million tonnes hit in late January.

Traders said banks in China also remained cautious aboutlending to small importers using bonded stocks as collateralafter forex authorities tightened controls over such business inMay, helping to cut demand. Lending on physical imports to thedomestic market stayed normal, they said.

The higher supply, poor arbitrage and restricted lending onbonded stocks point to lower premiums.

"If premiums fall further, some importers may choose toleave the metal in the LME warehouses," a trader at a largeShanghai-based Chinese copper trading firm said.

He said importers, like his firm, that were still lining upto take deliveries of the metal they had already bought from LMEwarehouses could leave the metal there because lower premiumswould cause losses if they took the metal back to China.

It wasn't immediately clear how much of the previouslybooked metal could be left in the LME warehouses.

Johor in Malaysia holds the largest stocks in LME warehousesin Asia currently, with 202,150 tonnes on Thursday(MCU-MYJHB-CATS). Up to 75 percent of the Johor stocks arebooked for shipment, with the bulk expected to head to China. (Editing by Tom Hogue)

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