Low copper demand from China, the largest consumer, and the movement of surplus metal to London Metal Exchange (LME)-approved warehouses have pushed price discounts on near-term contracts to record highs relative to benchmark contracts.
The contango, or discounts, on the LME’s spot contracts relative to benchmark or three-month forward contracts jumped to more than $160 a metric ton this week, compared with a level of around $70 two months ago.
Copper stocks in LME warehouses stood at 206,775 tons, doubling since mid-May to the highest level since October 2021. Reuters reported in May that Chinese copper producers planned to export up to 100,000 tons of the metal.
Alastair Munro, metals strategist at Marex, says: “Deliveries of stocks to the LME continue. This coincides with reports that Chinese production rose 9.5 per cent year-on-year to 1.055 million tons in June, following reports that Chinese smelters would be delivering to LME warehouses due to a lack of real physical demand in China.”
Producers and traders often sell surplus metal on the LME as a last resort as companies need cash flow. Financing banks and commodity traders buy the metal and then sell it at a future date at a higher price to make a profit after deducting costs such as warehouse rents and insurance, in what is known as an “carry trade”.
Industry sources said the reason for the record high contangos was due to rising interest rates, particularly in the US, which has led to higher financing costs for the metal.
A copper trader said: “Contangos reflect the cost of holding physical metal. When costs go up, the contango go up. The biggest cost-raising factor comes from US dollar interest rates. The amount (of copper) that has been subscribed in such a short period of time is huge and it looks like there will be more.”
Three-month copper futures are priced at about $9,800 a ton, down more than 10 per cent since hitting an all-time high of $11,100 on May 20.
