The London Copper Market remains in a critical squeeze, as a shortfall in available inventories drives prices to near-record levels and leaves buyers paying huge premiums for spot metal.
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Copper tracked by London Metal Exchange warehouses that's not already planned to be debarred was near the lowest since the 1970 s on Tuesday, since the 1970 s. This month's European stockpile drop was driven by a steady flow of orders to take metal out of the visible depots. And while the record spot premiums must typically start attracting metal back into the warehouse network, there s little sign of that happening so far.
The flash squeeze that emerged on the LME is an extreme example of the supply shortages that crop up across commodities markets as surging power costs imperil production and Covid - 19 snarls global supply chains are null. Following similar squeezes on the metals market, fears over critical shortfalls have now reached buyers in the biggest steel world base markets.
The squeeze has helped underpin a hike in prices - benchmark futures have jumped 10% in the past week and are closing in on a record. Spot contracts have rallied even further and cash prices are soaring past all-time highs which were hit in May.
The blowout in spreads has drawn the attention of the exchange - the LME said Monday it was monitoring the situation closely and has options to ensure an ordered market is maintained.
This is an extreme situation, Oliver Nugent, a metals analyst with Citigroup Inc. at London, said by phone today Across the metal markets, one of the big themes has been consumers wanting to build up their working inventories, and that has escalated a lot of tightness. The giant spread between spot and futures contracts is known as a backwardation, and it can create huge problems both for investors, whose purchase contracts often reference cash prices, and consumers who have sold futures and need to buy their positions back before they expire.
The unprecedented backwardation also means that anyone with metal in hand could make an annualized return of about 40% by selling their metal through the spot contract and buying it back later via three-month options. So far the huge delivery incentive isn t attracting much metal into the LME warehouse system, but that will probably change soon, Nugent said.
It is highly likely that we will see more metal diverted on to exchange, he said. It s hard to see a bigger motivation than delivering metal to the LME. After a slow delivery of on Monday, on-warrant stockpiles backlined again on Tuesday, reaching just 15,225 tons, within touching distance of a 47 - year low last week. The cash to-delivered spread was trading $740 a ton on Tuesday after closing at a record $1,103. On Monday, 50 a ton appeared.
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