Copper prices are trading at a premium to futures on the London Metal Exchange, indicating a scarcity of the metal.
Copper futures are more expensive than buying it on Tuesday. The price premium for the 3-month contract with the highest volume has increased to its largest level since 2021.
Thu Lan Nguyen is the head of FX research and commodities at Commerzbank AG. She said that the strong demand for imports from the US threatens the LME warehouses and SHFE storage facilities.
These investors face problems because they have hedged their positions against a possible decline in the copper price.
Nguyen stated that “they lack the material necessary to close out their positions and are therefore forced to purchase on the spot markets.”
A sudden end is on the horizon
How long this trend will last is hard to predict.
This trend will likely end abruptly when the US imports demand drops.
Nguyen believes that the current trend will end suddenly, and it could be sooner than you think.
She added that “the increase in copper imports was not due to a rise in demand but rather due to the fear of US tariffs being introduced on the import of copper”.
Uncertainty remains about the introduction date of tariffs. It’s a reasonable assumption that the implementation of these tariffs will be tightly tied to ongoing trade negotiations.
Some countries want to be prepared for new US sectoral tariffs after the negotiations and when tariffs have been established.
Nguyen said:
Copper tariffs are less likely to be implemented the more successful trade negotiations.
Inventory decline
Inventory declines at the LME and SHFE do not indicate a general shortage of copper.
These declines were primarily caused by regional distortions of the market, which are likely to be the result of potential US tariffs.
The sharp increase in COMEX inventory is a clear indication of this.
Copper stocks on LME have increased slightly since mid-June (on warrant stocks).
This slight rise in stock is due to the significant drop in warrants that have been cancelled, which indicates a reduction in copper designated for immediate deliveries. The trend indicates that a correction is imminent in the market.
It may be a sign that inventory is nearing its end.
Global Situation
According to the International Copper Study Group’s report, the supply was deficient in April but an overall surplus is expected for the year.
The copper industry has seen a decline in the treatment and refinement charges (TC/RC).
Bloomberg reported that in February China’s metal output, which according to USGS figures accounted for 44% of global production last year, had fallen into the negative zone.
As reported recently, a significant event in the mining industry is an agreement reached between a Chilean miner and a Chinese metal smelter that will eliminate all TC/RC fees.
Nguyen stated that “the effective processing fee of zero applies to the copper ore extracted in the next year. This represents a low record for future deliveries.”
The refined copper output in China is still high and reached a new record in both April and May.
There is no visible effect on the demand for smelters
The strong imports of copper ore by China indicate that the low TC/RCs has not affected smelter demands yet.
Nguyen stated that “it can be assumed the Chinese metal production level will stay at least high.”
According to reports, Chinese smelters want to boost copper exports in order to replenish LME stock.
Nguyen said that, “despite signs of tightening on the copper market (yet), there’s no indication of an acute shortage of copper.”
We continue to expect the price of copper to fall as long China’s metal production, which is the world’s largest manufacturing nation, remains resilient. We forecast USD 9,500 per tonne for the year end.
The post Copper price spike signals strain but there is no acute shortage as yet. Updates may change this.
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