Shanghai's usually quiet copper market has become the talk of London metal traders in the past few weeks, as an unexpected arbitrage has begun to emerge between the international benchmark on the London Metal Exchange (LME) and Shanghai.
Market analysts point to a US$400-$500 per tonne average premium in Shanghai over London, and physical stocks at LME warehouses are at their lowest since last October, falling 85,000 tonnes in the past six weeks to 191,500 tonnes.
Last week, renowned copper market player Herbie Black, president of American Iron and Metal, said the Shanghai arbitrage was becoming the next play in the market.
His comments have been backed up by London metals trader Brandeis, which said about 40,000 tonnes to 50,000 tonnes of the 85,000 tonne-drop seen at LME warehouses had found its way into bonded warehouses on the mainland.
'That's where the puzzle begins, because the fact that it's gone to bonded warehouses means that it's not customs-cleared yet,' Robin Bahr, copper analyst at Brandeis, said.
'So, is this metal destined for end-use consumption, or is this another trading opportunity?' The main buyers of Western copper are thought to be China National Import Export Corp, who, some analysts say, may be looking for a way to beef up the price before selling their increasingly long position back into an inflated Western market.
Another answer might lie with the Chinese government strategy for the national stockpile in copper, which might still be depleted after a sell-off last year halved its average holdings of about 200,000 tonnes.
