LONDON, April 12 (Reuters) - Seasonally stronger copper demand in top consumer China and dwindling stocks of scrap are expected to narrow the discount between metal for nearby delivery against the three-month contract, which hit a four-year high this week.
The discount or contango for the cash copper contract against the three-month forward on the London Metal Exchange jumped to $35.25 a tonne MCU0-3 this month, matching the high hit in June 2013. It closed at $27.25 on Tuesday compared with a $3 premium in January.
“As second-quarter physical buying gets underway the contango will decline,” Societe Generale analyst Robin Bhar said. “Copper rallied because people were worried about supply disruptions, it saw scrap dealers around the world sell inventory, the bulk of which has probably already come through.”
China is the world’s largest consumer, accounting for nearly half of global demand estimated at more than 23 million tonnes this year. Chinese demand typically rises in the second quarter ahead of the summer months when construction and industrial activity picks up.
The trigger for scrap dealers to release stocks was higher benchmark copper prices, which climbed above $6,200 in February, the highest since March 2015 and a gain of nearly 30 percent since November last year.
Citi analyst David Wilson expects scrap supplies to increase by one million tonnes this year relative to 2016, overwhelming losses of around 385,000 tonnes from disruptions at mines.
“We expect the rate of scrap flow to slow into the second half of the year, as scrap inventories at merchants are drawn,” Wilson said, adding that disruptions could cut mine supply by around 7 percent this year.
That is above the 5 percent analysts typically assume.
Disruptions include strikes in Chile at BHP Billiton’s Escondida, the world’s largest copper mine, and in Peru at Cerro Verde.
In Indonesia, production at Freeport-McMoRan’s giant Grasberg mine in Papua fell after the government banned copper concentrate exports on Jan. 12, part of an effort to boost the local smelter industry.
These problems gave the impression of bottlenecks and supply shortages, but there was no shortage of concentrate for smelters, Aurubis, Europe’s largest copper producer, said in a newsletter.
“There were large amounts of cathode that suddenly appeared on the official warehousing system,” it said.
Stocks of copper in LME-approved warehouses rose more than 70 percent to above 340,000 tonnes in the first half of March but have since fallen more than 30 percent to below 260,000 tonnes. They are expected to fall further as demand strengthens over the next three months.
Editing by Susan Thomas