Salient to Investors:

Copper stockpiles are rising to the highest in a decade, yet manufacturers are paying the biggest premiums for the metal in as much as 7 years as financing deals lock up supply and extend lines at warehouses.

LME copper inventories more than doubled in the past year and supplies exceed demand for the first time since 2009.

Metal Bulletin data show buyers in Shanghai pay $135 a metric ton more than LME futures, up from $55 last year.

Copper entered a bear market in April. Goldman Sachs expects a decline to $7,000 in 12 months.

Standard Bank predicts global output to rise 4.3 percent to 21.1 million tons in 2013 as demand expands 2.2 percent to 20.9 million tons.

Glencore Xstrata, Goldman Sachs, JPMorgan Chase and Trafigura Beheer control more than half of the 700-plus sheds in the LME’s network.

Financing typically involves buying the metal for nearby delivery and forward selling to take advantage of a contango, where prices rise into the future – transactions helped by record-low borrowing costs.

Robin Bhar at Societe Generale said most manufacturers get metal on long-term contracts with suppliers, using LME warehouses to buy metal if needed. Societe Generale estimates that as much as 80 percent of aluminum inventory tracked by the LME, as much as 60 percent of zinc and as much as 50 percent of nickel are tied up in financing agreements. Bhar said the main casualties will be consumers – historically, higher stocks, higher supply would result in lower premiums, but we have circumvented the normal laws of economics.

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