Copper futures swing to steep backwardation with shorts caught on bullish move

Twenty lots of the LME’s cash/three-month spread traded at a $42.75 backwardation at 9:28 am London time in an inter-office transaction, exchange data on Fastmarkets Mydesk shows.

Aside from last October 31’s $65 per tonne backwardation, the LME’s three-month contract has not traded this far below the cash contract since January 2015.

The sharp swing to backwardation comes as copper’s cash price has risen 6% since the start of the year, trading at $6,305 per tonne today.

Bullish expectations that the metal will experience a deficit market this year are beginning to override concerns that a trade-war induced decline in global growth will impact copper demand.

Base metals price movements have sharply shifted away from macro-driven headlines to become more fundamentally-driven since the start of the year.

“For copper the fundamentals are on the bullish side – the shorts have played it right but it might be coming to the end of their timeline,” Fastmarkets head of base metals and battery research William Adams said.

The International Copper Study Group forecasts a small refined deficit of 65,000 tonnes for 2019.

Shorts squeezed out of bullish run
Chinese traders were said to be selling the April Shanghai Futures Exchange contract heavily and buying up March contracts, which has filtered through to LME movements this morning.

But those looking to buy spreads have been made to pay, with a 50-79% dominant holder of LME warrant holdings and tomorrow/next warrant holdings as of yesterday’s settlement positioning data.

“If you need the cargo and you’re short you just have to get out,” a spreads trader told Fastmarkets.

“The whole thing has been a bear trap, the negative macro been short for so long but a generally weaker dollar and a structurally short physical market have been in the background for a while now and starting to come to the fore,” a second trader said.

Shanghai copper premiums sink to 2-month low on spread tightness
The sudden backwardation has seen traded premiums for copper cathodes shipped to China to drop today to $50-70 per tonne basis cif Shanghai, the lowest level this year.

“No one can hold cargoes in this kind of backwardation,” a physical trader there said. “Now sellers can’t wait to sell their cargoes, but buyers are not in a hurry to buy.”

The worsening spreads have led some holders of metal to sell cargoes into the spot market rather than take a hit on rolling their positions on the LME.

“We have bought around 1,500 tonnes of SX-EW [solvent extraction and electrowinning] cargoes at $50 per tonne, I wouldn’t be surprised if there is a flood of cargoes into the market with such a wide backwardation,” a second physical trader said.

Premiums for cathodes shipped to Shanghai were already in a downward trend with a heavily negative arbitrage to bring cargoes into the country, a small backwardation since February 13 and increasing copper stocks in SHFE warehouses.

Copper stocks at SHFE-approved warehouses increased by 45.1% or 64,391 tonnes to 207,118 tonnes in the week to February 15 compared with February 1.

Shanghai-bonded copper stocks rose by 16% to 441,000-446,000 tonnes on February 11 compared with the 2018 low of 381,000-386,000 tonnes on October 22, according to Fastmarkets calculations.