The dog days of August are normally a quiet time for copper traders, but not this year.
The London Metal Exchange (LME) copper contract has been engulfed by a summer storm this week.
The premium for cash copper over three-month delivery ballooned to $545 per metric ton on Monday, the widest backwardation since 2021. The cash price registered a new record high of $14,912 per ton.
The chaos meter that is the LME's "tom-next" spread — the cost of rolling a position one day forward — exploded to $110 per ton on Tuesday morning.
The flash squeeze already shows signs of abating as shorts deliver metal against their positions, but the underlying tensions in the copper market presage more turmoil ahead.
FLASH POINT
This week's turbulence in the London market results from a jarring clash of positions around Wednesday's prime August prompt date.
The LME's daily positioning reports showed three entities holding large long positions ahead of this week's cash crunch.
One had cash positions equivalent to 30-40% of warranted stocks. Two were in the 50-80% band, meaning the cumulative length comfortably exceeded total available copper in the LME warehouse system.
LME stocks closed last week at a six-month low of 207,825 tons. With almost half of that inventory in the form of cancelled warrants, live stocks were just 103,075 tons.
The combination of low stocks and large cash positions created the perfect storm for short position holders, some of whom have scrambled to deliver physical metal to cover their exposure.
STOCKS BOOSTER
A total of 38,150 tons of copper has been delivered into the LME warehouse system over the last three days, including 5,000 tons in Hong Kong and 17,300 tons in Baltimore and New Orleans in the U.S.
The former suggests the LME backwardation has been strong enough to pull metal out of China, extending the tug-of-war for available copper between LME traders and Chinese buyers.
The U.S. deliveries underline why there is such acute competition for copper in the rest of the world.
Most of the world's exchange stocks of copper are located in the U.S. thanks to the pull of the CME premium over the LME price.
CME warehouses in the U.S. accounted for 58% of global exchange inventory at the end of July.
LME stocks were also heavily skewed to U.S. locations at the end of last month. U.S. warehouses accounted for 37% of the London market's total registered inventory and 79% of its off-warrant inventory.
Some of that metal has likely been used to cover August short positions.
TENSION REMAINS
The burst of warranting activity has caused time-spreads to ease. The cash-to-three-month backwardation has retreated to $176 per ton and "tom-next" to $71 per ton, although that's painful enough for anyone still looking to roll short positions forward.
The problem, however, is that the gravitational pull of copper towards the U.S. is undiminished and will remain so until President Donald Trump provides some clarity on whether he intends to impose import tariffs on refined copper.
The White House is maintaining a policy of strategic ambiguity, which means the CME copper contract is continuing to price in the possibility.
There was a brief moment on Monday when the LME cash price traded above the U.S. cash price, but by Tuesday the CME premium was back.
Moreover, with the LME forward curve in backwardation and the CME curve in contango, the arbitrage gap between the two only increases over time. The CME premium for three-month delivery is $430 per ton. That for 10-month delivery is over $1,000 per ton.
The gap is wide open for traders to continue making easy money by shipping copper to the U.S., which means that this August storm in London is unlikely to be the last.
(The opinions expressed here are those of Andy Home, a columnist for Reuters.)
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