The current bull run in the gorse metal appears to be on shaky ground, driven by intense speculative activity and a race to cover significant short positions, which may be bets on lower prices, or producers hedging their output.
Copper's swift rally to record levels may not be sustainable in the coming weeks as action focuses on shipping material to cover exposed short positions in the US Comex futures market rather than tepid demand in China, the main consumer.
Prices on the CME Group's Comex hit a record last week, while benchmark copper on the London Metal Exchange (LME) soared to an all-time high of US$11,104.50 a metric ton on Monday, after up 28% so far this year.
Analysts say copper's long-term fundamentals are strong, with a bullish outlook associated with firm demand in the coming years for applications including the global transition to clean energy and greater use of artificial intelligence (AI).
This faces limited supply, causing a race among miners for high-quality projects.
The current bull run appears to be on shaky ground, driven by intense speculative activity and a traders' race to cover significant short positions, which may be bets on lower prices, or producers hedging output.
At least 100,000 metric tons of copper are on their way to the CME exchange in the United States, two sources with direct knowledge said on Monday, which will go a long way to allowing parties to meet bearish positions and alleviate market pressure.
"At the moment, it's purely speculative demand rather than real," said Robert Montefusco of brokerage Sucden Financial.
"It all depends on whether that demand becomes real, because once the specifications are published, it will simply disappear," he added.
There was a total net short position of 7,525 contracts, or 85,334 tonnes, at Comex, Friday's data showed.
However, there was a large difference between the speculators' net long position of 72,785 contracts (825,382 tonnes) and the producers' net short position of 91,502 contracts (1.04 million tonnes).
SHIPMENTS FROM CHILE AND PERU
Sources have said commodities traders including Trafigura and IXM, as well as Chinese copper producers, are among those caught in a brief crisis on Comex.
Many of those shorts have organized shipments of copper from Chilean and Peruvian producers to the United States, redirected vessels heading to China with long-term contracts, and some copper removed from LME warehouses.
More than 20,000 tons from Chile are expected to arrive in the United States by the end of May, with larger volumes expected to arrive in June and July, two producer sources said.
However, the transfer of copper from LME-registered warehouses to Comex could be limited. Chinese and Russian copper, which account for 67% of LME stocks, are not eligible for delivery on Comex.
There are 17,250 tonnes of copper produced in Chile, Peru and Australia that are duty-free in the United States and were in the LME system at the end of April, exchange data showed.
CHINESE DEMAND LOWERS
Consumption in China, which accounts for about half of global copper demand, is expected to be lackluster due to a struggling real estate sector and industrial consumers resisting record prices for the metal.
China announced "historic" measures last Friday to stabilize its crisis-hit real estate sector, but it will take time for a sector that is usually a large consumer of industrial metals to recover.
At the moment, the signs are gloomy, with the Yangshan copper premium, which reflects demand for imported copper to China, hovering around zero after falling to -$5 a ton last week, compared with US$60 a ton in March.
"Given the significant financial duration in copper and the persistent weakness in Chinese fundamentals for the time being, we believe there remains a risk that investors lose some patience with the story," JPMorgan analysts said in a note on Monday.
"In our view, this could ultimately be a very healthy correction that acts to bring Chinese demand out of its stupor."
Much of the potential Chinese demand is stagnant and could kick in at lower prices, JPMorgan added.
Investors and analysts remain optimistic in the medium and long term due to increased global demand and disruptions to mining supply.
