Shanghai copper futures recovered on Thursday after a 4 percent drop on Wednesday, supported by a spot market that showed signs of tightness despite releases by the State Reserves Bureau.
Spot copper prices in China are well over 1,000 yuan ($124) a tonne more than the front-month futures contract, December, even though the December to January backwardation is about 500 yuan, and backwardation further out is a steady 200-300 yuan. The stretched prompt backwardation implies tight short-term supply.
Copper, much of it of Chinese origin, has been steadily flowing into London Metal Exchange warehouses in Asia, and is believed to be marshalled by the SRB to deliver against a short position before the end of the year.
LME warehouses in Singapore and South Korea now hold 84 percent of the copper in LME warehouses world-wide.
"The SRB is selling its old copper and buying new copper, mostly Chinese-branded," Barclays Bank analyst Ingrid Sternby told Reuters on Thursday. The SRB failed to place about 6,500 tonnes of spot copper in a 20,000-tonne auction on Wednesday. But Sternby said that may have been because prices were set too high, and traders decided to hold off for a subsequent auction next Wednesday.
"If they had held the auction today, it would have sold a lot better," said analyst Cai Luoyi of China International Futures Co, referring to higher LME futures prices on Thursday.
Spot copper prices in eastern China rose to 37,500-38,400 yuan on Thursday, up 150 yuan.
On the futures market, the most active January contract ended at 36,000 yuan per tonne, up 390 yuan from Wednesday's close. Combined trading volume fell to 78,178 lots, from 162,088 lots on Wednesday.
The benchmark LME three-month copper contract was at $4,125 a tonne at 0700 GMT, up $90 a tonne from the close of Shanghai markets on Wednesday.
Shanghai aluminium futures rose on Thursday, with the most-active March contract ending at 17,430 yuan a tonne, up 150 yuan from Wednesday's close. Combined trading volume fell to 10,348 lots from 16,490 lots.
Benchmark LME aluminium futures rose to $2,071.50 a tonne at 0700 GMT, up from $2,020 when the Shanghai market closed on Wednesday.
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