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Copper market dynamics amidst short squeeze

18 May 2024 9:27 am
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Mumbai, 20 May (Commoditiescontrol): The copper market is currently experiencing significant turbulence, with prices on the London Metal Exchange (LME) nearing $10,500 per ton. This surge is largely driven by speculative activities on the COMEX, a US exchange known for its speculative nature compared to the LME, which is preferred by end users. The spread on COMEX has expanded dramatically, reaching premiums over $1,000 per ton.

Recent market behavior has led to numerous reports of major trading houses facing margin calls due to their short positions. In particular, China Molybdenum Co., Ltd (CMOC), which owns the IXM trading group, addressed these concerns in a report to the Shanghai Stock Exchange, asserting that their positions are "completely controllable" and fully hedged to mitigate price risks.

Similarly, Reuters reported that both IXM and Trafigura are actively sourcing physical copper to deliver into the CME to cover their short positions, indicating a significant effort to manage exposure amidst volatile prices.

The market's speculative behavior reflects an anticipation that current copper prices are outpacing actual demand. China's copper purchases remain subdued, highlighting a disconnect between market pricing and demand fundamentals. Concurrently, supply disruptions have constrained concentrate availability, compelling smelters to secure feedstock at elevated costs, sometimes operating at a loss. There is an expectation among traders that redirected shipments into the US may alleviate some of the price pressures, although this adjustment could take up to two weeks.

Trading volumes in base metals have surged, with LME contracts reaching unprecedented levels of liquidity. This spike is driven by speculation on base metals, buoyed by hopes for a lower interest rate environment and improved Purchasing Managers' Index (PMI) data. Additionally, sanctions on Russia have exacerbated concerns over metal shortages, further fueling the speculative rally.

Hedge funds are positioning themselves heavily in copper, with positions reaching their highest levels since January 2018. This trend is mirrored in Shanghai, where futures trading volumes have also hit record highs in April. The excitement extends to retail investors, as evidenced by significant inflows into exchange-traded funds (ETFs) seeking exposure to the recent rally.

Despite the current market exuberance, there are voices of caution. The Chilean copper commission, Cochilco, projects average copper prices of $4.3 per pound ($9,480 per ton) for 2024, and $4.2 per pound ($9,260 per ton) for 2025, suggesting a more tempered outlook than current prices indicate.

In summary, the copper market is being heavily influenced by speculative activity and supply constraints, creating a volatile environment. While some anticipate prices may stabilize as logistical adjustments are made, the current dynamics reflect a complex interplay of speculative fervor and real-world supply disruptions.

(By Commoditiescontrol Bureau: 09820130172)


       
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