Codelco’s Chinese customers are reluctant to sign up for copper supply in 2022 at the highest premium in seven years because of strong backwardation in the copper market, three sources with knowledge of the matter said.
Backwardation is a structure where prices for immediate delivery are higher than for future delivery, indicating strong near-term demand, and Chinese buyers are afraid they may lose money on the copper further down the line.
Chile’s Codelco, the world’s biggest producer of mined copper, on Nov. 1 offered Chinese clients physical delivery of copper at a premium of $105 a tonne over London Metal Exchange (LME) prices next year, the highest level since 2015.
It is not unusual for buyers in top copper consumer China to consider Codelco’s offer too high and take time to agree. On this occasion, however, backwardation is the main stumbling block, the sources said, declining to be identified because the discussions are private.
Codelco did not immediately respond to a request for comment.
The spread between cash and three-month LME copper prices blew out to a record of more than $1,100 a tonne on Oct. 18 as inventories dwindled to their lowest since 1974.
The backwardation has since eased to $160 a tonne but buyers are still reluctant to sign up while prompt prices are higher.
“Traders don’t know when they are going to sell the material or put it in a warehouse,” one of the sources said. “They want to make money for certain the Codelco number is fixed.”
He Jinbi, chairman of Chinese metals trader Maike Group, a Codelco customer, said he sees the backwardation persisting for a whole year because of low copper inventories and logistical constraints.
A shortage of shipping containers is causing bottlenecks in global trade.
Maike is in the process of arranging logistics for possible copper exports from China, said He, in a move that could ease backwardation by delivering metal into LME warehouses.
(By Tom Daly; Editing by Mark Potter)