Copper stockpiles at bonded warehouses in Shanghai have fallen from a record since the beginning of May as consumers in the world’s largest user of the metal draw down inventories.

“Following the shrinking of imports, the bonded stocks now have to be drawn down to meet demand from traders and consumers, whose inventories are at very low levels,” said Pang Ying, an analyst at trading house Shenzhen Rongtuo Trading Co. “I’ve heard from market participants that 10,000 tons to 20,000 tons has been sold from bonded warehouses to the spot market.”

Shrinking bonded stockpiles, following a decline at local exchange warehouses, may signal a pick-up in Chinese demand and a return to the import market. Stockpiles held in bonded warehouses in Shanghai climbed to a record of 650,000 metric tons from 550,000 tons in late February, Standard Chartered Plc. said in a research report on April 28.

“Bonded stocks have dropped thanks to a pick-up of seasonal demand,” Peng Qiang, an analyst at Cofco Futures Co., said by phone from Beijing. “There has been much more copper from the bonded warehouses offered on the spot market recently than earlier this year.”

Bonded warehouse stocks have been anecdotally reported to have fallen by close to 50,000 tons by the end of April, Nicholas Snowdon, an analyst at Barclays Capital, said in a research note on May 11. The houses located in Shanghai’s so- called “free-trade zones” are used to store arrivals that haven’t cleared customs. There is no official data available on warehouse levels.

Imports Drop

Imports of unwrought copper and products tumbled 23 percent in the first four months of this year to 1.17 million tons, according to China’s General Administration of Customs. Inventories at Shanghai Futures Exchange warehouses fell for the eighth consecutive week to a seven-month low of 105,465 tons, the bourse said today.

The premium paid by the buyers to sellers of the bonded stocks rose to around 80 yuan ($12) a ton this week, compared with the April low of 30 yuan to 40 yuan, according to Shenzhen Rongtuo’s Pang.

Copper futures traded on the Shanghai bourse in late April moved into a backwardation, with prices of nearby contracts higher than forward ones, indicating a tightening in the spot market. The most-active contract in Shanghai dropped 4.7 percent last week.

“The price slide at the beginning of the month helped to lure buyers enter into the market, and accelerated the destocking process,” said Wang Zhouyi, an analyst at Shanghai CIFCO Futures Co.

Lower Price

Copper for delivery in three months on the London Metal Exchange declined 5.3 percent in the first week of May, and traded at $8,865 a ton at 4:47 p.m. Shanghai time, 13 percent lower than the record $10,190 in February.

The metal used in cable and wiring traded on Changjiang, Shanghai’s largest nonferrous metals sport market, was quoted at about 66,700 yuan a ton today, indicating the LME cash contract and Shanghai prices are about level.

“Once the arbitrage starts to move in favor of imports, the material could quickly be customs cleared and sold on the physical market,” said analysts led by Bonnie Liu at Macquarie Group Ltd. in a report on April 18. The bank estimated the bonded stocks stood at 550,000 tons, and said the inventories, which usually averaged at 200,000-300,000 tons before 2010, totaled 400,000 tons at the end of last year.

More than half of the bonded stocks belong to trading houses using copper imports as a method to get cheaper financing, according to the report.

Financing Deals

China has raised banks’ reserve requirement ratio eight times and interest rates four times since October last year. The tight credit has forced companies to seek alternative ways to finance their daily operations.

China’s State Administration of Foreign Exchange said on March 30 that the foreign exchange income from Chinese companies which re-export the metal shall be deposited to an account, and will be frozen until the final payment for the imports is made.

“The policy change had some impact on the financing deals, but the impact is limited, as there are plenty of other ways to use copper as a financing tool,” said Cofco’s Peng.

Trading companies receive a letter of credit for copper imports and then get a window of three to 12 months of cheap credit. When Shanghai prices are at a discount to those in London, importers can avoid losses by reselling the materials to third parties in the bonded area and receive a net-cash inflow, according to Macquarie.

--Helen Sun. Editors: Matthew Oakley, Richard Dobson

To contact the Bloomberg News staff on this story: Helen Sun in Shanghai at hsun30@bloomberg.net