(Kitco News) - A supply crunch and growing demand have pushed the coppermarket to the brink of a new breaking point as the London Metals Exchangeadjusts its rules to deal with historically low inventory levels.
The current supply/demand imbalance has pushed copper pricesback to near-record highs just below $10,000 a tonne on the LME exchange.Prices have moved back to the May highs as inventories in LME warehouses havefallen to 15,225 tonnes, their lowest level since 1974.
The low inventories have promoted the LME to take temporaryprecautions to maintain the market's liquidity.
"With immediate effect, the LME (acting through theSpecial Committee) has determined that it is appropriate in the circumstancesto take the following three actions1 in respect of copper, which are intendedto ensure market orderliness: (i) amending certain requirements within thelending rules; (ii) imposing a limit on the backwardation for tom-nextcontracts; (iii) introducing a deferred delivery mechanism for certaincontracts," the LME said in a statement. "These changes are intendedto be temporary and will be reviewed as appropriate by the SpecialCommittee."
Although base metals are expected to see supply deficitsthis year, some analysts have noted that while unique market issues are alsoimpacting supply levels, the world is not running out of copper.
Colin Hamilton, commodities analyst at BMO Capital Markets,noted that the supply issues that caused the LME to initiate the temporarymeasures have revealed flaws in the system; however, he added that the world iswell supplied with copper.
"LME copper warehouse inventory isn't actually that low- indeed it was lower last time copper traded above $10,000/ t. But withcanceled warrants representing over 90% of this (signifying a desire to removethis material from the warehouse), only 14kt of on-exchange copper wasavailable to the market. And the fact that this occurred into the LME'sLME's prompt-dateexpiry does point to a classic short squeeze," he said.
Hamilton added that a lot of companies are hoarding themetal as they anticipate further supply issues in the future. He likened thecurrent sentiment in the marketplace to what happened with toilet paper at thestart of the pandemic as consumers emptied shelves of toilet paper around theworld.
"It is natural psychology that, when there is concernthat something critical to day-to-day operations may be in short supply in thenot too distant future, purchasers rush out to buy it. And given thecombination of ongoing logistics constraints and power issues, end-users ofmetals are feeling that pressure now. Feedback from LME Week was that end-usersare currently sitting with more material on their balance sheets than usual tobuffer against shocks, contributing to the near-term stock draw," he said.
Commodity analysts at TD Securities said that they expectthe measure taken by the LME should alleviate the pressure of the currentshort-squeeze.
"Extreme levels of backwardation should ultimatelyincentivize metal to make its way into the exchange, further satisfying thenear-term squeeze, but this acute supply shortage highlights that the market'sability to withstand such shocks is extremely low," the analysts said.
Not all analysts are optimistic that copper can hold on toits record highs. Bernard Dahdah, commodity analyst at Natixis, said that basemetals could face a near-term correction demand starts to normalize in thefirst quarter of 2022.
"Much of the base metals rally through 2021 can beattributed to a 'bumper year of demand' as consumption deferred in 2020 waspushed into 2021. We would expect that in 2022 we return to more normal levelsof demand which will attenuate the supply pressures," he said in a report.
Dahdah added that softening economic activity worldwide,particularly as China deals with a weakening housing market, could weigh globalbase-metal demand.
By Neils ChristensenFor Kitco News
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