American Metal Market’s assessment of the US copper cathode premium rose to 6.5-7 cents per lb delivered to the Midwest on Tuesday June 19, the highest level since mid-July 2014. This marks the second upward move since late May, when the premium also logged a half-cent gain.

Throughout the year, transportation costs - particularly long-haul trucks - have risen to astronomical levels, with spot rates up 30% year on year in some locations. The confluence of increased regulations, difficulty finding truck drivers and costly fuel surcharges are all squeezing the entire supply chain and forcing the premium higher.

Consumers were resisting the higher premium at the beginning of the year due solely to freight and logistics costs, but they later relented and have even begun announcing their own price increases to offset the rising input costs.

"The trucking issue is by far causing the biggest headache," one consumer source said.

The surge in logistics costs is only one issue spurring the premium market, along with a difficult arbitrage situation between CME Group and London Metal Exchange pricing. You can see this demonstrated in falling CME copper stocks, which now stand at 227,612 short tons as of June 18 - a modest decline, although stocks have been rising consistently on a month-on-month basis since November 2016.

Additionally, multiple market participants characterized the spot market as active, considering the traditionally slow summer months and that demand overall was very good. That is leading consumers who get unexpectedly short on material to pay a double-digit premium, with one consumer source reporting a 12-cent offer last week.

"The arb situation nearby is absolutely terrible; July Comex is about a 4.7-cent-per-lb discount to [the] LME [price]," another trader said. "Factoring in increased cost of freight and [the] premium paid for metal, plus port fees, you’re rushing into double digits very quickly before even starting to factor a margin."

The consensus on an active spot market wasn't universal, though. Some copper users said deals are sparse and won't return in sufficient numbers until September.

"There is a lot of chatter but I can tell you that on a spot basis, very little is being booked at [a] $0.06-plus [premium]," a major supplier said. "We seem to be in a state of flux... as trucking, financing is going up, and yet higher premiums are not being paid. Further, there is a lack of demand."

A premium in excess of 6.5 cents per lb was rejected only a few months ago, with the rationale being that for levels above that number consumers could simply go into CME warehouses to acquire material. 

But the market has not been able to grasp the severity of the trucking shortage, continually underestimating how difficult it would be to obtain drivers - especially during peak demand periods. 

Previously, warrant holders would take unused cathode and store it in western US warehouses, waiting for spot demand to return in the latter half of the year.

But now the premium is high enough to dissuade those moves, and metal holders are trying to maximize sales due to the higher premium.

"At these rates, it is beginning to make sense to not ship into Comex warehouse[s]... Instead, [metal holders can] offer [material to] consumers, who just may agree to pay the higher premium," one trader source said. "Also shipping out of the warehouses is now clearly in the cards."

Whether the premium can maintain this level or even push higher will depend on how demand evolves this summer. The latest estimates indicate US gross domestic product growth of nearly 4% for the second quarter, double the pace of the first quarter. 

For now, after years of meddling premiums and poor demand, the copper market is ascending and the premium is entering territory not seen in four years.