Source: Wall Street News

The victims of the historic New York copper futures emptying case are surfacing.

On May 15, the media quoted people familiar with the matter as reporting that commodity trading giant Toke and China$CMOC (03993.HK)$/$CMOC Group Limited (603993.SH)$Its subsidiary IXM is trying to buy physical copper to settle their large short positions on the US CME exchange.

Torc and IXM hold large short positions in the COMEX (part of CME Group) copper market, which means they are betting on falling copper prices or hedging their own price risk exposure. But I didn't expect COMEX copper prices to suddenly skyrocket starting Tuesday, causing these short positions to be seriously “emptied.”

By Wednesday, COMEX's highest copper price hit a record high of 5.1775 US dollars per pound ($11,414 per tonne), rising 14% over the past week and surging 28% this year. As of press time, COMEX copper had declined to $4.94 per pound.

Tork admits to diverting copper transportation to the US, Lo Moly says the risk is completely manageable

In response to media reports, Torque acknowledged that it would ship more physical copper to the US.

Torc is one of the largest physical copper suppliers in North America, and given the premium in this market, we are shipping more copper to COMEX.

According to reports, Tokk has asked some copper producers to divert May and June shipments to the US, but it is very difficult to temporarily change destinations.

Notably, Tork was bullish on copper prices before. Group CEO Jeremy Weir said at the CRU World Copper Conference last month that in order to fill the potential supply gap of 8 million tons by 2034, mining companies need prices higher than 10,000 US dollars per ton, which may even be as high as 12,000 US dollars.

Luoyang Molybdenum issued a statement on Thursday saying that IXM's hedging trading strategy is different from simple speculation, and the risk is completely manageable. IXM is one of the world's largest physical non-ferrous metals traders.

The hedging strategy of an international trading company buying in one market and selling the same amount in another market is common practice in the industry. Currently, there are high premiums for copper products in the US COMEX market. As a global commodity trading company, it is beneficial to carry out physical transactions in this market. The hedging trading strategy of Excelson (IXM) is different from simple speculation; the risk is completely manageable.

CME responded that they will continue to monitor the market, but believes that it has performed well as a market participant in managing copper risk and uncertainty.

People familiar with the matter said that COMEX copper prices will continue to rise until copper products shipped from South America and Australia to the US reach the market, which may take several weeks.

What really happened in the derivatives market?

The main reason why New Zealand copper is shorting out is that the supply and demand for copper is tightening. On the one hand, supply-side frequency disruptions have raised concerns about copper supply shortages; on the other hand, global manufacturing recovery and energy transition have boosted demand for copper. In addition, construction and development costs for major mines are also increasing.

Existing copper production will drop sharply in the next few years. The agency predicts that miners will need to invest more than 150 billion US dollars between 2025 and 2032 to expand copper capital expenditure to meet the industry's supply needs.

However, CRU analyst Robert Edwards believes that fundamentals are not enough to explain such extreme prices.

Although there is not much support from the fundamentals of US copper supply and demand, it may not justify this extreme situation, which indicates that something else may be happening in the derivatives market.

At the same time, COMEX copper prices surpassed that of the London Metal Exchange (LME), creating arbitrage opportunities for producers and traders, who can make arbitrage sales using the price difference between the two places.

Citi pointed out in a report that arbitrage-related and pure short recovery has driven COMEX's gains. This increase may be difficult to maintain. The redirection of physical copper will ease the imbalance in arbitrage, but it will take time.

The price of copper at LME is about $10,240 per ton. Considering costs such as freight and insurance, traders can earn around $300 per ton by obtaining copper from the LME system and delivering it to CME. However, the problem is that half of the available copper in LME registered warehouses comes from Russia and cannot be delivered to the CME system.

Editor/jayden