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. 'If that's the case, you may see the metal moving out of the warehouses, although this is complicated by the fact that being the government stockpile, it would not have to clear customs,' Mr Bahr said. If the metal is cleared by customs then it is likely to be intended for consumption, but as long as it is being held in bonded warehouses, it easily could come back into the market, and traders say this possibility will depress the price. The low price of LME copper, which has failed to break above $1,970 per tonne, suggests traders do not believe China wants it for its own consumption. However, the arbitrage is persisting because there is an element of doubt about whether China is consuming more than it produces and is having to buy more copper than usual. Adam Rowley of Macquarie Equities said the higher price was nothing suspicious, and simply caused by higher demand in China. 'People have talked about market manipulation, but it really doesn't seem to have been the case,' he said. An earlier incident where China sold forward for 12 months 80,000 tonnes of copper that it shipped into LME warehouses in Singapore, before returning it back to the strategic stockpile, was simply spotting a market opportunity to take advantage of 'backwardation' - when prices for near-term delivery were higher than those for later delivery, he said. 'I have to say we really doubt it will come out,' Mr Rowley said of the copper in China's bonded warehouses. 'The metal has been shipped to China only because it is entirely needed there. Obviously, demand remains strong at the moment and there has been some shortage of scrap, blister and concentrate in China.'