Source: Golden Ten Data

The huge gap between the price of copper in New York and the price of copper on other commodity exchanges shocked the global metal market and prompted people to frantically ship copper to the US.

The reason for the confusion is that the bearish squeeze in recent days has boosted prices on the New York Mercantile Exchange (Comex). The premium for New York copper over the London Metal Exchange (LME) price has soared to an unprecedented level of over $1,200 per tonne, while the usual difference is only a few dollars.

This sharp rise in price spreads has left major players, from Chinese traders to quantitative hedge funds, taken by surprise, some of whom are now scrambling to find metals they can deliver under futures contracts that are about to expire.

This sharp fluctuation highlights how commodity markets quickly get out of control when market participants are no longer able to finance their positions — a situation that is more likely to occur in a low inventory environment and logistics chaos. Over the past few years, commodity traders have faced logistical chaos in everything from nickel to cocoa.

Comex's fluctuations also reflect a surge in speculators' interest after predicting that long-term copper production would be difficult to meet demand. Although less important than LME, as part of the CME Group Inc. (CME Group Inc.), Comex is an important venue for investors, some of whom have built significant bullish copper bets at Comex in recent months.

Matthew Heap, portfolio manager at Orion Resource Partners, the largest metals fund management company, said, “The broader picture is that new investment funds are increasing their investment in copper for a variety of reasons.”

Although copper prices have been rising for several months, this week's surge is for Comex and the most active July delivery futures contracts. By Wednesday, the price of the July contract had surged 10% to a record high for the contract, although LME's global benchmark contract was largely flat.

Many traders and brokers believe this move is a typical bear squeeze. Market participants are betting that the COMEX contract price will be consistent with the price of LME and Shanghai Copper, another global copper benchmark, but as the price rises, they are forced to buy back these positions, creating a vicious cycle.

Colin Hamilton, managing director of commodity research at Bank of Montreal Capital Markets (BMO Capital Markets), said that the price difference of more than $1,000 per ton between New York copper and London copper was “unseen before” and that “short positions were squeezed before the contract expired, exacerbating this trend.”

Hedge funds and other traders stand on the opposite side of bullish Comex trading, betting on narrowing the spread between New York, London, and Shanghai contracts or between New York contracts with different delivery dates, and often use a lot of leverage.

Due to relatively low prices on the Shanghai Futures Exchange, some Chinese physical market participants are also selling at LME and Comex, planning to export.

Comex's July copper contract soared to a record $5.128 per pound ($11,305 per ton) on Wednesday morning. The contract's trading premium also set a record higher than the Comex September contract — this situation is known as the spot premium in the commodity market and is a sign of a tight bear market.

Traders and brokers said that the reason for the sharp rise in prices was short recovery rather than an overall physical shortage, but this also revealed the problem of relatively tight supply in the US copper market.

Currently, Comex tracks a total of 21066 short tons of inventory, while LME's inventory in the US is only 9,250 tons. In contrast, the annual demand for copper in the US is close to 2 million tons. Traders say steady demand and shipping problems on the Panama Canal and Suez Canal have strained supply in the market. US copper imports have fallen 15% so far this year, according to data from consulting firm CRU Group.

Short squeezing is nothing new in the commodities market; it often drives people to frantically search for physical supplies to support paper contracts.

In 2020, due to lockdown measures in most parts of the world during the pandemic, gold traders scrambled to ship metals to address similar imbalances between New York and London gold prices.

In 1988, the empty extrusion of aluminum caused some traders to load the metal into giant jets to ship it to LME as soon as possible, an extremely unusual and expensive method of transportation for industrial raw materials.

Currently, the extrusion of Comex copper has sparked a similar boom in shipping copper to the US. According to people familiar with the matter, Chinese traders have been calling shipping companies for the past 24 hours to try to secure transit to the US. South American traders and miners are also racing to increase shipments to the US. People familiar with the situation said that Chilean copper giant Codelco is putting all of its available copper on the market and is negotiating with customers to postpone some sales in order to maximize deliveries.

By Wednesday afternoon, some signs indicated that the squeeze was easing. Comex's July copper contract fell by as much as 1.7%, and the premium with LME spot copper narrowed to $650 per tonne, but this is still an all-time high.

Since investors holding bullish positions through commodity indices will begin rolling out their copper positions in early June, this may further mitigate the decline in copper prices, thereby providing traders with short positions an opportunity to defer delivery, thereby easing the future market.

However, it is unclear whether this will be enough to resolve the squeeze before the July contract expires.

Gong Ming (Gong Ming, transliteration), an analyst at Jinrui Futures Co., Ltd. (Jinrui Futures Co., Ltd.), said that Chinese traders who want to ship copper to the US have discovered that the shipping schedule has already been fully booked, and the shipping schedule from Shanghai to New Orleans will be until early July at the earliest.

Most of the copper stocks outside the US come from brands that cannot be delivered with Comex futures, which also exacerbates the plight of copper miners affected by the squeeze.

For example, more than 80% of LME's 94,700 tons of copper at the end of April were produced in Russia, China, Bulgaria, or India, and copper from these countries cannot be delivered at Comex. Although China's inventory has increased significantly in recent months, traders estimate that only about 15,000 to 20,000 tons of it can be delivered through Comex futures.

Goldman Sachs Materials analyst James McGeoch pointed out in a report on China and copper that copper is “ushering in the Cocoa Moment.”

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