China strategy on LME copper short to support prices -UBS
Copper CatalogThe Chinese State Reserve Bureau's strategy in dealing with its substantial short copper position on the London Metal Exchange is likely to maintain market tightness for longer, UBS base metals analyst Robin Bhar said Friday.
China's SRB is thought to be using a combination of buying back, delivering physical metal and rolling its short position estimated at 100,000-200,000 metric tons, Bhar said in a report.
Given the tightness in the market, "buying back and/or rolling positions forward in a tight market showing large backwardations maintains upward pressure on prices," Bhar said.
This is likely to prolong copper's backwardation, currently at $82 on the cash-to-three-month spread, offering better value further out on copper's forward curve than for long positions at high prices on nearby positions.
Well, I thought copper would go up due to this....
Late in 2005, LME copper prices rose sharply as participants added longs, betting that the Chinese government would have to buy copper to meet delivery obligations, said to fall Dec. 21.
"Furthermore, with the market in deficit for the past three consecutive years, industry stocks are below critically low levels and the stocks-consumption ratio is forecast to remain below four weeks over the next three years and should continue to underpin strong copper prices," Bhar said.
The absence of a squeeze on the Dec. 21 delivery date points to short positions having been rolled or borrowed to various delivery dates in 2006 and 2007 as nearby dates widened, he added.
Meantime, stocks in LME warehouses in Asia have jumped over the past few months, with warehouses in Asia now holding almost all of 132,950 tons LME copper warehouse stocks.
Chinese exports rose sharply in December and remained high in January, reflecting shipments by the SRB to LME warehouses.