Panic sets in as short squeeze rockets copper priceAFR 16...

Panic sets in as short squeeze rockets copper price

AFR 16 May

Copper futures that are traded in New York surged to a record high after a short squeeze rattled global markets, driving a scramble to redirect shipments of the base metal to US warehouses.Comex futures for July delivery surged as much as 4.8 per cent to $US5.12 a pound overnight, passing the most active contract’s record set in March 2022. That high on Comex is equivalent to $US11,305 a tonne – more than $US1000 a tonne above the latest price on the London Metal Exchange.The rally in copper prices helped push the Bloomberg Commodity Spot Index – which tracks 24 energy, metal and agricultural contracts – to the highest level since April last year.Copper prices on COMEX have soared about 28 per cent this year. BloombergThe significant disparity between prices traded in New York and other commodity exchanges in London and Shanghai has wrong-footed traders that were betting on the Comex contract moving back in line with its peers.“[The price difference] really just emphasises how aggressive this squeeze is and reflects concerns that there may not actually be enough metal for delivery into the July Comex contract,” Westpac’s head of commodity and carbon strategy, Robert Rennie, told The Australian Financial Review.“So it’s causing a lot of pain, and it’s causing traders to pay up any price.”Speculative traders have ramped up bets that copper prices will fall.In the two weeks to May 7, they were searching for a short-term peak in prices and added 143,000 tonnes of short positions in high-grade copper futures, according to Saxo Markets.But as prices continued to climb, investors have been forced to buy back their positions at a loss, or deliver physical copper to close out their position.Commodity traders Trafigura and IXM are among those looking to buy physical copper to deliver against large short positions on US exchange CME, Reuters reported.Mr Rennie added that the panic among traders was exemplified by the Comex market being pushed into its largest backwardation – indicating extremely tight supply in the immediate term – with the July contract trading almost 30¢ a pound above the September contract on Wednesday.The short squeeze has added fresh thrust to copper’s rally this year which has been fuelled by an expected surge in demand due to its use in electric vehicles, grid infrastructure and AI data centres.That is coinciding with tightening supply amid a string of mine closures alongside slower than expected production growth from expansions and new copper projects.That dynamic has led traders to pile into the commodity; at the end of April, speculative investors amassed the biggest net long position in the metal since 2021, data from the Commodity Futures Trading Commission showed.Short but sweetBut commodity strategists argue that the violent spike in copper prices is unjustified given inventory levels in China, the world’s biggest consumer of the metal, are not at critical levels yet.Indeed, copper stocks monitored by the Shanghai Futures Exchange have surged to 300,000 tonnes, a level last reached four years ago when demand collapsed during the pandemic.China will report April production data on Friday, which includes copper output.“While the Chinese market has received a boost from the prospect for additional government support, the near-term fundamentals do not stack up with the current exuberance,” Ole Hanson, head of commodity strategy at Saxo Markets, wrote in a report.Additionally, the premium that importers are prepared to pay over LME copper has disappeared, which is another indication that the rally has been driven by exchanges in London and New York, and not China.“Overall, the direction of copper is up, but following the latest surge to a record high – the timing of which occurred somewhat sooner than expected – a period of consolidation looks increasingly likely,” Mr Hansen said.Saxo believes the Comex contract could retreat all the way back to $US4.56 or even $US4.40 a pound.There are already signs that the squeeze is easing, with the July Comex contract falling as much as 1.7 per cent in the aftermath.