Copper market squeeze: It is back!
Copper prices should be bolstered in the second half of this year as the effects of a surprise rate cut in China in early June begin to flow through, stimulating demand in the world's top copper consumer.
Reuters reports that on top of increased demand, the re-emergence of a dominant market player in London Metal Exchange copper stocks could squeeze the market just as it did in April.
Earlier in the year an "entity took control of up to 90 percent of cash contracts and inventories on the LME, facing off against Chinese market participants who were caught with short positions".
That entity was widely believed to be Swiss commodities trading giant Glencore:
"Glencore may be positioning themselves in a period like this now where there's fairly weak demand outside of China and so picking up warrants in the U.S. and Europe is probably not all that difficult," said a market source who declined to be named.
"So I don't think we've seen the end of squeezes by any stretch of the imagination."
The LME handles around 80% of global trade in metals futures and manages 600 metal warehouses around the world.
LME copper stocks had fallen dramatically since the start of the year and have not improved significantly since hitting the lowest levels since the 2008 recession during the northern hemisphere spring.
The copper price is also – like it was in April – in backwardation, meaning stocks for delivery in three months are cheaper than cash copper for immediate delivery.
On the fundamental side, the outlook for copper has also improved. Chile's state-owned copper giant Codelco, which dwarfs other global producers of the metal, said last week it has not seen the effects of a slowdown in China on its copper exports nor the prices it receives.
The International Copper Study Group released data showing the global market for refined copper fell into a deficit of 236,000 tonnes during the first quarter versus a deficit of 61,000 tonnes at the start of 2011 as miners struggle with labour issues and new supply remains slow to come to market.
Copper futures were trending higher on Tuesday building on 10 straight sessions of gains with front-month contracts trading at $3.52 a pound.
The red metal is now up just over 6% over the last month and at these levels are well within marginal costs which for copper producers are in the $6,000 – $7,000 a tonne range or roughly $2.75 – $3.15 a pound.