The copper market has gone crazy. Operators are paying more than $ 1,000 per tonne of premium to have physical copper. It is a differential not seen to date and arises in the middle of the fear that there will be a short-term shortage of the metal. However, there are experts who attribute this behavior to speculative movements to take advantage of the latest bullish blows of copper that is exceeding $ 11,300 in cash contracts.
Under normal conditions, in the commodity market futures contracts always offer a discount compared to the cash payment. The spread varies depending on the balance between supply and demand, to the point that when there is an excess supply the price of futures tends to be more expensive, which is known as a contango market. But today the mismatch is occurring on the demand side of most raw materials. Specifically, in copper it is being so strong that it has led three-month futures to trade at a discount of $ 1,000, a differential with respect to the cash payment that exceeds the levels of 1994, when the Sumimoto financier scandal returned crazy to the copper market registering the last record.
The reopening of economies is putting an extraordinary demand on raw materials, many producers, extractors and distributors saw their activity paralyzed due to the pandemic. Supply chains and global trade, key to a market like copper, are still suffering from delays in deliveries, which in many cases is ending up with stock, stored for years.
The Copper inventories on the London Metal Exchange (LME) have fallen by 90% in the last two months after a strong increase in orders. The British market operator manages a large warehouse to meet contract maturities. The $ 1,000 spread is well explained by this circumstance. Traders who need physical copper for their clients are opting to pay a higher premium than to acquire a futures contract for which there are serious doubts that after expiration it will become the precious metal for lack of existence. “We are closely monitoring the situation and have options available to ensure the proper functioning of the market if there is an increase in orders,” the LME told Bloomberg.
Reserves are also shrinking at the speed of light in other markets such as China and the US, hitting all-time lows. On paper, the voracity of operators responds to the need to ensure supplies from the risk of shortages. “Copper bulls are back, although earlier this year the bull market mood had been fueled by fears of a long-term undersupply, today’s narrative is about short-term scarcity“explains Carsten Menke, an analyst at Julius Baer. But the expert mistrusts the reasoning that” the world is running out of copper. “
“Physical operators make reserves disappear that most likely will never reach the manufacturers”
“This is an inventory game in which physical traders are participating,” denounces the analyst. “Physical operators make reserves disappear that most likely will never reach the manufacturers,” he says. Physical traders have entered the financial arena to squeeze the bull market for copper by buying futures contracts in the past, with the aim of selling it at a higher price when the opportunity arises. “This behavior occurs when the market is at its maximum peak or very close to it,” he adds.
There is an improvement in the supply situation as global mining production is already recovering from last year’s lows and is at its highest levels in five years. The market is rebalancing, according to Julius Baer. High prices paid on the spot challenge the worst economic prospects being offered by China, one of the world’s largest copper consumers.
In the short term there are some headwinds, mainly due to concerns about the Chinese economy, “explains Jay Tatum, manager of Valent AM. China, despite being the third largest copper producer in the world, is the largest importer. As the energy crisis intensifies, an industrial blackout in the Asian giant would be a severe blow to the price of metals, including copper.
But the price of copper may continue to fly if its financial component jumps. Since last year, it was the big bet of many big investors and it was considering practically like the new oil, when it came to moving the economy. Copper occupies a strategic position when it comes to the transition from a green economy.
“Copper is rebounding amid an intensifying energy crisis, and rising inflationary fears may rekindle investor enthusiasm,” said Wenyu Yao, senior commodities strategist at ING Bank. “The fear of inflation could increase the demand for metals, as there is a perception that they are a hedge against inflation, which is especially true for copper.”
The price of the three-month copper future is trading above $ 10,300 compared to $ 11,300 in cash. “There is a risk that financial traders will follow this trend started by physical traders, which could drive prices further, but the discount should be limited as invisible inventories will become visible again,” Menke says. “It is increasingly likely that these prices will persist through the fourth quarter before the inevitable return to earth occurs,” says Panmure Gordon analyst Kieron Hodgson. .
The world is running out of copper and inventories only cover three weeks of demand
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