The copper market has gone crazy. Operators are paying more than $1,000 per tonne in premium for having physical copper. It is a differential not seen to date and arises amid fears that there will be shortages of the metal in the short term. However, there are experts who attribute this behavior to speculative movements to take advantage of the recent bullishness of copper, which is exceeding $11,300 in spot contracts.
Under normal conditions, in the commodity market, futures contracts always offer a discount compared to the cash payment. The differential varies depending on the balance between supply and demand, to the point that when there is an excess of supply, the futures price tends to be more expensive, which is known as a . But today the imbalance is taking place on the demand side in 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 compared to cash payment that exceeds 1994 levels, when he drove the copper market crazy. copper registering the last record.
The reopening of the 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 world trade, key to a market like copper, still suffer from delays in deliveries, which in many cases is destroying stocks that have been stored for years.
Copper inventories on the London Metal Exchange (LME) have fallen by 90% in the past two months after a strong increase in orders. The British market operator manages a large warehouse to meet contract expiration dates. The spread of $1,000 is well explained by this circumstance. Traders who need physical copper for their clients are choosing to pay a high premium, rather than acquire a futures contract that there are serious doubts will become the precious metal after expiration due to lack of existence. “We are closely monitoring the situation and we 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 the operators responds to the need to ensure supplies in the face of the risk of shortages. “Copper bulls are back, while bull market mood earlier this year had been fueled by fears of long-term undersupply, today’s narrative is about short-term shortages.” , explains Carsten Menke, an analyst at Julius Baer. But the expert is wary of the reasoning that “the world is running out of copper.”
“Physical operators wipe out reserves that most likely will never reach manufacturers”
“This is an inventory game in which physical merchants are participating,” denounces the analyst. “Physical operators wipe out reserves that most likely will never reach manufacturers,” he says. Physical traders have gotten into the financial realm to squeeze the bull market out of 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 or very close to its peak,” 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. The high prices paid on cash defy the worsening 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 at 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 deal a severe blow to the price of metals, including copper.
But the price of copper may continue to soar if its financial component jumps. Since last year, it was the great bet of many large investors and was practically considered as the new oil, when it came to moving the economy. Copper occupies a strategic position when it comes to transitioning to a green economy.
“Copper is recovering amid an intensifying energy crisis, and rising inflation fears may revive investor enthusiasm,” said Wenyu Yao, senior commodity strategist at ING Bank. “Fears of inflation could increase demand for metals, as there is a perception that they are an inflation hedge, which is especially true for copper.”
The price of the three-month copper future is trading above $10,300 against $11,300 in cash. “There is a risk that financial traders will follow this trend started by physical traders, which could push prices further, but discounting should be limited as invisible inventories will once again become visible,” Menke says. “It is increasingly likely that these prices will persist through the fourth quarter before the inevitable return to earth occurs,” says Kieron Hodgson, an analyst at Panmure Gordon. .
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