Ebb and flow in New Orleans copper stocks distort market -traders

Reuters

By Josephine Mason

NEW YORK, Sept 27 (Reuters) - Copper stockpiles in CME GroupInc's sole New Orleans warehouse, owned by JPMorganChase & Co, have vanished this summer as quickly as theyappeared, spurring fresh talk over how financing deals andoff-exchange stocks have distorted supplies and bolsteredpremiums.

On the face of it, the abrupt decline in inventories a monthago made perfect sense. Domestic demand was improving, exportsto China were growing, and Comex offered the quickest way to getlast-minute supplies. Exchange warehouses in other locationsalso saw a draw-down, although not as steep.

But some physical traders in the United States said the drophad little to do with fundamentals. They pointed to London MetalExchange data showing that its own separate New Orleanswarehouse stocks rose by a similar amount that Comex declined,calling it a stark example of the shuffling stocks that haveroiled metal markets for years.

"Someone's getting paid to take the metal out (of HenryBath) and put it back in (the LME system)," said one U.S. traderwho has handled U.S. copper for over a decade.

The activity in the Big Easy, one of the biggest deliverylocations measured by number of storage facilities, illustrateshow base metals are now seeing the big stockpiles, highincentives and long wait times that have beset the aluminummarket for the past four years.

Frustrated industrial users say they are paying inflatedphysical prices for raw material. The situation has drawnscrutiny from British and U.S. regulators and led toclass-action lawsuits by end-users.

The port, described by many traders as a "black hole" forcopper and zinc because of its distance from industrial usersand the logistical difficulties in getting metal out of it, has60 percent of the almost 1 million tonnes of zinc stored inLME-registered warehouses and almost 40 percent of LME copper.

More than half of the zinc and a quarter of the copper arewaiting to be delivered out of warehouses there, but the waittime for metal can be months, dealers said.

With LME warehouse operators offering incentive payments totraders and producers to store metal with them, and stocks inmost U.S. LME-registered warehouses declining, traders and endusers seeking copper have raided Comex warehouses, where thereare no lines and no financing deals.

"Comex warehouses are the only source of freely availablemetal," said Wiktor Bielski, base metals analyst at VTB Bank.

"(LME) copper in New Orleans is locked up in financing dealsand some of it is held off warrant. In a tightening environment,it is very unlikely to be released."

Trucking metal from warehouse to warehouse has also createda "smokescreen", a veteran U.S.-based trader said, giving theimpression of dwindling supplies, which has bolstered physicalprices in the United States even as other regions have comeunder pressure, traders said. Copper premiums arebetween 5 and 7 cents per lb.

FOUR DAYS, 20,000 TONS

The drawdown in New Orleans was conspicuous for its size andspeed, but stocks in Comex's other six locations have alsofallen, exchange data shows, as traders shipped material toChina, the world's largest consumer, where physical prices werealmost double U.S. levels.

Copper started leaving Henry Bath's warehouse in New Orleanson Aug. 12, Comex stock data shows, just months after thefacility took its first-ever delivery of the metal. The growthin activity in the Comex contract, a distant third among globalcopper futures, has prompted traders to expand to previouslyunutilized Comex sheds.

Two days later, Aug. 14, material started arriving in LMEwarehouses in the port, LME stock data showed. Stocks began torise for the first time in a month, a sign that metal was beingtrucked out of Henry Bath and into warehouses registered withthe LME, dealers said.

Pacorini, owned by Glencore, has 34 sheds and operates mostof the 54 facilities registered with the LME in the port. Inaddition to its one Comex warehouse, Henry Bath has three LMEfacilities there.

By Aug. 26, Henry Bath was empty of the almost 20,000 shorttons, equivalent to 18,000 tonnes, it had stored there sinceMay, according to Comex data. Four days later, LME copper stocksin New Orleans had risen by just over 21,000 tonnes.

Stocks in U.S. LME-registered warehouses have increased 5percent since May, exchange data shows, largely due entirely tothe build-up in New Orleans, where warehouses pay big incentivesto lure in metal.

Supplies in the LME's other four U.S. locations have fallensharply. In St Louis, three facilities run by Metro and Noble'sWorldwide Warehousing Services are almost empty, data show withmetal there also being lured to New Orleans on rent deals.

In so-called financing deals that have become rampant due tolow borrowing costs and a wide forward pricing curve, it isprofitable for traders to store metal in warehouses for longperiods of time and to sell forward at a higher price.

'SMOKESCREEN'

Beyond the metal stored in LME financing deals, traders saytraders have also stashed big tonnages of surplus metal in NewOrleans in off-exchange storage, further distorting thesupply-and-demand picture and effectively removing even moremetal from the market.

Stocks of 200,000 tonnes in LME warehouses in the port are afraction of what is sitting off-exchange, dealers said. Thereare no official statistics to support their claims.

"This isn't transparent," said a second U.S. trader."There's more copper than people know floating around NewOrleans. It'll make you scratch your head."

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