Chinese importers are buying less spot copper as it has become more difficult to secure U.S. dollar letters of credit and on sufficient domestic supply, traders said on Friday.
This has cut spot premiums and may spill over into next year, with the world's top copper producer Codelco expected to offer a premium of $110 a tonne for refined copper for delivery in 2012.
The Chilean miner is meeting Chinese clients next week, and could settle prices then, traders said.
We understand that they are thinking of cutting by $5 for 2012, said a trader at an international trading firm, which bought Codelco copper.
A $110 premium would be a 4.3 percent cut from the $115 Chinese smelters have paid this year and the low-end of a $110-$115 range that had been expected by Chinese buyers.
Spot premiums above the cash London Metal Exchange copper price were around $120-$125 on Thursday for copper already in bonded warehouses in Shanghai, traders said. Offers remained at $130-$150, depending on the volume, compared with $140-$170 in late October.
Supply of bonded stocks, in Shanghai but not yet assessed for China's 17 percent value-added tax, had risen after arrivals rose in the previous few weeks and weaker Chinese copper prices prompted importers to store arrived metal in bonded warehouses.
Traders estimated about 300,000-330,000 tonnes of bonded stocks in Shanghai currently, compared to 150,000-200,000 tonnes in late October.
The availability of letters of credit to import copper has fallen after some banks in the eastern provinces of Zhejiang and Jiangsu tightened requirements to local firms in September-October due to escalated private debt worries.
Importers in the southern industrial province of Guangdong found it difficult to obtain LCs for copper from this month, traders said.
Banks have about used up all 2011 U.S. dollar quotas and are doing less LCs now, said a manager in Nanhai city, whose firm trades copper and produces semi-finished products.
He added that local banks were more selective on LCs and that would continue for the rest of this year.
In China, dollar-denominated LCs are seen as short-term foreign debt, and banks receive annual quotas.
Some banks in Guangdong had required local firms not to re-export their copper imports, a trader at an international trading house said.
In the domestic market, fabricators had reduced buying of spot refined copper after they bought extra amounts last month on low prices, traders said.
End-users cut buying from Thursday. But supply remains abundant because investors have been trying to offload imported copper in the spot market, a trader at a large Chinese copper producer said.
Investors, who import refined copper as a way to obtain short-term loans to circumvent stricter yuan lending rules domestically, had sold imported metal aggressively when domestic prices were at around 59,000 yuan ($9,297) a tonne, he said.
Spot copper traded at that level between late October and Nov. 9, compared to the year low of about 52,450 yuan seen on Nov 20.
Increased supply was weighing on Chinese prices, keeping the arbitrage between the LME copper and Shanghai copper prices closed, traders said.
China's October arrivals of anode, refined copper, alloy and semi-finished products increased 0.8 percent on the month and 40.2 percent on the year to 383,507 tonnes, a 17-month high.