Nearby backwardation in London Metal Exchange (LME) copper contracts could incentivise delivery into the LME global warehouse network.
"We will see material moving into the LME [network] sooner rather than later, it can happen very quickly," said brokerage Marex Spectron's global head of market analytics, Guy Wolf. "Often the material is here [already] but just needs to be warranted."
Off-warrant copper delivery into LME warehouses could happen "in a couple of weeks," according to Wolf.
"We have already seen a small increase in LME copper stocks [on 7 March] and there are suggestions that a significant volume may arrive in the near future," said research consultancy Capital Economics' senior commodities economist, Ross Strachan. "I would not be surprised if this occurred, most likely in Asia given that it has become less attractive to sell copper into China given the arbitrage."
LME on-warrant copper stocks have tumbled this year, standing at 33,825t today, down by 71pc from 115,800t at the beginning of the year. Inventories fell as low as 21,600t on 28 February — the lowest since 2005.
Cancelled copper warrants have increased more than fivefold this year, to 82,900t today from 16,375t at the start of January. Cancelled warrants accounted for 71pc of total stocks and the majority of the cancellations are in the US, with 26,175t of copper booked for removal in Chicago and cancelled warrants in New Orleans at 42,425t.
And Comex copper inventory in the US has been decreasing this year, falling to 54,178t yesterday — its lowest since 3 November 2015 and nearly halved from 109,829t on 2 January.
The cancellation in the US could be being driven by final consumer demand, some traders said, but US physical spot market activity has been low, with consumers reporting stable consumption.
There is a genuine tightness in global refined copper supply, as there has been little investment in new supply growth, according to both Strachan and Wolf. This has contributed to the backwardation.
But it is the off-warrant or invisible stocks that are driving the backwardation.
"One of the main challenges is that we do not know how much stock is off-exchange, and the uncertainty over supply tightness can create volatility in spreads," Wolf said.
The LME copper cash to three-month spread swung into backwardation on 14 February, reaching its widest at $63/t on 5 March. Since then, the backwardation has narrowed and last traded at $28/t at 12:32 GMT today.
Backwardation often attracts metal for nearby delivery because of the higher prompt contract prices. The higher financing costs also force short sellers to cover their positions by delivering against prompt or cash contracts.
