WILL CHINESE COPPER TRADING ECLIPSE THE LME ?


PRICING THE COPPER ARBITRAGE: At launch, the INE contract was priced too high relative to the global market, but it quickly sold down towards physical arbitrage levels.


This chart (below) compares one snapshot of the INE, SHFE and COMEX contracts against LME Copper on 23 November 2020, at 15.58 London time:


• Nearby COMEX was at a discount to LME, whereas forward COMEX was at a premium, although all prices are inside the physical arbitrage boundary estimated at approx. $80/ Mt, i.e. the cost to move metal between LME and COMEX.


• Looking at the SHFE-LME Arb, in contrast to the two way flow possible between LME and COMEX copper, the VAT on refined copper effectively makes the flow one way into China’s domestic market when the “arb window is open”:


i.e. “arb open” when SHFE > ((LME + CIF) x RMB x VAT) + Admin Charge (Y100)


The “LME + CIF” depends on how the LME metal is sourced, but could be $40 FOT +$20 shipping = $60/Mt.


If warrants are picked up via a warrant sift, then you receive the cheapest clearing warrants which may be far away from China and also in a warehouse queue, meaning additional LME rent, plus costs to cancel the warrants and ship to China.


If you buy specific warrants, e.g. Singapore, Malaysia, Taiwan or Korea, you’ll also pay a premium.


• The INE contract’s first prompt month is in March 2021, which was trading above March 2021 SHFE when adjusted for VAT.


Chart 1: Various Cu - LME Cu (US$/Mt) - 23 Nov 2020, 15.58 London time.


Source: Reuters / ADMISI


17 | ADMISI - The Ghost In The Machine | Q4 Edition


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