Tight supply, while surging demand is pushing copper prices back near historic highs. However, experts believe that the supply of copper is not actually lacking, but because businesses are panicking.
Copper prices climb because LME inventories are at a record low
The imbalance between supply and demand has pushed copper prices back to near historic peaks set in May this year. On the London Metal Exchange (LME), copper prices are currently hovering near the $10,000 mark as inventories at the LME are only about 15,225 tonnes – the lowest level since 1974.
As the LME’s copper inventory nears depletion, futures trades can be wildly volatile. At that time, the copper market is at risk of a sell-off situation, when the futures contract price is below the expected spot price when the contract expires, Bank of America warned in May.
Record-low inventories have forced the LME to adopt three interim measures to help keep markets running smoothly. One of the new rules allows anyone who holds a short position but cannot deliver to defer the obligation to deliver for a certain fee.
In addition, the LME has also initiated an investigation, which requires banks and brokers to provide information about their trading activities as well as about their customers in the copper market over the past two months.
This move of LME can help suppliers avoid the risk of shortage of goods to meet delivery requirements from buyers. Through the investigation, the LME was also able to make traders and banks think twice before asking for more coins.
(Artwork: Getty Images).
Copper is like toilet paper
Although copper supply is expected to be in deficit this year, some analysts note that the market is not actually exhausted of the metal, but only suffering from some temporary problems.
Sharing with Kitco News, analyst Colin Hamilton of investment bank BMO Capital Markets said that LME’s low inventories are caused by temporary shortcomings in the exchange’s system, but the world is still supplied with enough copper. .
Mr. Hamilton added that a lot of businesses are hoarding supplies because they believe that supply will continue to be tight in the future. He likens the current sentiment in the market to the shock that occurred with toilet paper at the beginning of the COVID-19 pandemic.
“It’s a kind of natural psychology, when people worry that the supply of a material that plays an important role in daily manufacturing operations may be short in the not-too-distant future. Therefore, they will rush to collect goods,” Mr. Hamilton explained.
“Copper supply issues combined with logistics challenges and global energy shortages are putting great pressure on the metal’s end-users. Reports from LME show businesses are accumulating stockpiling goods to withstand the shock, further reducing LME’s inventory in the short term,” the expert continued.
Commodity analysts at consulting firm TD Securities expect the LME’s emergency measures to help ease the impact of the current supply squeeze, according to Kitco News.
In the coming months, not all experts are optimistic that copper prices can hold onto record highs. Bernard Dahdah, commodities analyst at Natixis bank, said copper prices may experience a short-term correction as demand returns to normal in the first quarter of next year.
“Much of the base metals rally this year can be traced back to pent-up demand in 2020 and then into 2021. We expect copper demand to stabilize during the year. 2022, thereby helping to ease supply pressure,” Dahdah wrote in a report.
Not to mention, the analyst said that global economic activity may be about to slow down, especially as China has to focus on solving problems in the domestic real estate market. Therefore, metal demand in the near term may be weighed down.
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