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Copper Jumps to a Record High on Growing Market Disconnect

By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region

Copper Jumps to a Record High on Growing Market Disconnect

 
  • Natalie Scott-Gray
  • Senior Metals Analust 
  • Natalie.scott-gray@stonex.com

Copper closed at the end of last week (17th May) at $10,668/t, marking a significant 24.6% YTD increase, putting copper just behind tin and nickel as the third best performing back metal this year. However, this rapid bull rally in prices for copper has been driven by a growing market disconnect, with investment fund speculative buying into gross longs, versus a modest fundamental picture for 2024 and building risks in the macro-economic outlook. 

Copper LME 3M Price Performance Historical 

Source: Bloomberg, StoneX

The Role of Speculative Investment Activity on Copper 

The long-term attractive role of copper in the green transition set against a backdrop that mine production is forecast to peak in 2026, with structural refined copper deficits forming from 2027 onwards, has been at the centre of investment interest for the red metal over the last several years. However, following the largest copper supply shock in history in 2023, which reduced copper concentrate forecast supply in 2024 by ~2.7% (or 600,000t) (a figure which has now grown to 1.1Mt or 4.2% of global mine supply), interest from the investor side has mounted.

LME Investment Fund Positions on Copper – Record High Gross Longs & Net Long 

Source: Bloomberg, StoneX

COMEX Managed Money Positions on Copper- Record High Gross Longs

Source: Bloomberg, StoneX

A Note on COMEX ‘Short-Squeeze’ 

Over the last few weeks, the rapid increase in COMEX gross longs has resulted in a short squeeze on the exchange in which market players have been caught out on a reverse trade, betting on lower U.S. copper prices versus those on SHFE and LME (following building U.S. premiums with expectations that this would correct). As a result of this, those traders holding short positions on copper faced margin calls, with two options, to buy back their positions at a loss or exit their positions via the delivery of physical metal. The problem here however, occurs from a lack of physical material availability in the U.S. with low exchange stocks and restricted physical delivery options (i.e. no Russian or Chinese producer brands are deliverable against the CME contract). Given this, the arbitrage opportunities for copper between CME and LME have intensified with the CME backwardation jumping to a record level at the end of last week at ~ $1,200/t. In our view, we forecast it will take some time for CME and LME realignment. 

% Of Chinese and Russian Copper in LME Warehouses as of end-April 

-    50% of LME stocks are Russian origin 
-    17% of LME stocks are Chinese origin 
67% of LME copper stocks in warehouses are made up of brands undeliverable the U.S. 

COMEX Stock Levels 

Source: Bloomberg, StoneX

What Action Has the CME Taken?

-    On 16th May, the CME increased the outright margins on copper future by $500 to $5,000 per contract 

-    Increase margins for spreads on metal used in the power and construction industries  

SHFE Positions on Copper  

Source: Bloomberg, StoneX

The Disconnect

 Copper Prices Have Never Been This High in Such a Wide Contango Market

Source: Bloomberg, StoneX

 

The Realities Within the Fundamentals 

Copper Market Balance 

Source: BLC, StoneX, Bloomberg

No signs of Refined Tightness Yet 

1.    Chinese imports remain at a discount, while the Yangshan premium for copper cathodes has entered negative territory. The higher move in copper prices is likely to futher decrease domestic demand in the country, although arbitrage opportunities may result in increasing exports. 

2.    Global copper stocks remain at multi-year high levels, with SHFE seasonality charts highlighting well above five-year averages.

3.    China has delayed the issuance of April domestic production of refined copper (set to be released 17th May), however, SMM forecast output to fall to 965,000t, down 3.4% M/M, this however, would not be that significant with April output largely expected to contract M/M based on April being the peak maintenance period of the year. Please note, Q1 domestic output rose 7.7% Y/Y.  

Chinese Copper Stocks, Refined Production, Imports Premium Versus Smelter spot TC and Imports of Copper Concentrate

Source: Bloomberg, StoneX

Seasonality Chart Copper SHFE Deliverable Stocks Remain Well Above Five-Year Averages 

Source: Bloomberg, StoneX

Global Copper Visible Exchange Stocks

Source: Bloomberg, StoneX

Long-Term Focus on Future Green Transition Demand 

Source: BNEF, Bloomberg, StoneX

Mine Production Outlook 

Source: SMM, BNEF, Bloomberg, StoneX

 

Our View on the Macro Environment in 2024 Outlines Significant Risks 

Forecast Impact from Global Macro Drivers in 2024 

To read our latest Base Metal Outlook 2024 report click HERE. 

 

Source: StoneX

 

  • Base Metals

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