China's Aluminum Imports to Rise as Arbitrage Opens -Trade

China's primary aluminum imports are likely to rise until March with investors and merchants ramping up purchases after an arbitrage window between the London Metal Exchange and Shanghai opened for the first time since 2009, traders said on Wednesday.

Benchmark three-month LME aluminum dropped more than 18 percent from end-2010 to $2,017.5 per tonne around noon on Wednesday. Shanghai third-month aluminum contract fell by less than 6 percent during the same time, supported by lower domestic production.

"Some arbitrage trades started coming this week," Jing Chuan, chief researcher at Hua Tai Great Wall Futures in Shanghai said.

"A lot of people are watching and waiting for a wider price gap to do large volumes because this is a rare opportunity since 2009."

In 2009, an attractive arbitrage prompted Chinese to buy primary aluminum from the London Metal Exchange for selling in Shanghai , pushing up China's imports to a monthly record of 362,400 tonnes in April that year.

Imports by the world's top aluminum producer and consumer in October were at 9,650 tonnes.

"Imports would be rising from December to March if this continues," a trader at an international trading firm said.

Traders said just as with copper, Chinese investors and merchants were aggressively seeking imports of primary aluminum as a way to obtain short-term loans to circumvent stricter yuan lending rules at home.

"Although financing costs outside China have risen, they are still lower than those in China. Many investors want to import for financing purposes," a trader at an international trading house said.

Investors would use letters of credit to import aluminum and resell the metal in the domestic market as they are not required to pay back to local banks for the L/C in 3-6 months, traders said.

During that period, investors can lend the money to other firms and charge them high interest rates or use the money to finance their own projects.

Chinese were seeking premiums of about $100 per tonne over cash LME aluminum prices to import spot primary aluminum, traders said. Suppliers were offering aluminum at premiums of about $105-$110 to China .

Traders said suppliers were unlikely to sell spot aluminum at premiums of below $105 after Japanese buyers settled a quarterly premium of $112 with suppliers for delivery in January-March next year, a figure seen as the benchmark in Asia.

"(Chinese) buyers should be able to afford premiums of around $110 based on the current arbitrage," Hua Tai's Jing said.

Based on a premium of $100, import costs were at about 15,650 yuan ($2,500) a tonne on Wednesday morning, a trader said. The Shanghai third-month contract ended at 15,885 yuan in Wednesday morning trade.