The metal has been on an upward trajectory since March last year and its 28% price gain makes it one of the world's top-performing commodities of 2021 so far.

Wall Street banks such as Goldman Sachs, Citibank and Bank of America are all touting copper's prospects, while slowly expanding supply comes up against a post-pandemic rebound in global growth and an anticipated bright future as the electricity conductor for a new era of transportation.

But while investors and traders in Europe and the United States have become decidedly bullish on the copper price, the market's top consumer China is less optimistic, adding a layer of caution to the metal's red-hot rally and differentiating it from previous bull markets - including the ‘supercycle’ of the 2000s.

“Considering the price is close to an all-time high and consumption is bad in China, price volatility is expected to intensify,” Gong Ming of Chinese brokerage Jinrui Futures told Fastmarkets.

The widening differential between the two markets also tells the story of global recovery following the Covid-19 pandemic, while the prospect of vaccines rollouts and the re-opening of society is fueling optimism in Western economies, China, which accounted for 58% of the world's copper consumption last year, is beginning to lag.

Credit sets tone for prices
Perhaps the most visible manifestation of this is the price of the metal itself. At 71,890 yuan ($11,103) per tonne, the most-active copper contract on the Shanghai Futures Exchange is up by 24.5% since the start of the year, while the London Metal Exchange cash contract is up by 28.7%.



The cash price of copper on the London Metal Exchange (pink) has risen faster than its SHFE counterpart (blue).

Forward prices in London are in backwardation; cash prices are higher than in the future, indicating a lack of supply availability, at least in the short term. In contrast, the Shanghai market is in a solid contango, reflecting a well-supplied market.

Short-covering from Chinese market participants has helped fuel the rally in LME prices over the past three weeks, the head of metals and bulk sales at brokerage StoneX, Michael Cuoco, told Fastmarkets.

“Some may have felt the need to go short on the back of indications that China would be tightening things up. Then they covered a good portion of their short from the $9,305 [per tonne mark] all the way through to the $9,700 [per tonne level],” he said.

Differing government lending strategies in China and elsewhere has helped set the tone for the markets, several sources trading copper said. And while the US has been notable for its vast government lending over the past year, China has signaled recently that it looking to cool down its economy, pulling lending away from an overheated housing market.

Although Chinese banks made a record 3.58 trillion yuan in new loans in January, China’s outstanding total social financing, used as a gauge of overall credit flows, rose in March at its slowest pace in a year.

Demand drop
The reduced expectation for copper demand is playing out in buying behavior on the ground in China. Not only are purchasing managers only tending to bid for cheaper raw materials, such as scrap, but copper tube and rod makers also told Fastmarkets they are operating at reduced capacity with orders starting to dwindle.

“If you look at copper rod manufacturers, it’s not good. We've had discussions with some big factories who have closed a large chunk of their capacity because there's just no demand there," head of copper at Shanghai trading house ASK Resources, Eric Chen, told Fastmarkets.

Higher prices for raw materials also seem to be affecting buying. China's manufacturing purchasing managers index (PMI) stood at 51.1 in April (where a number above 50 indicates growth), but this was well below analyst expectations of 55.9 and down from a reading of 51.9 in March.

“There’s this assumption that demand is inelastic, which is not necessarily true. At these prices, it doesn’t’ make sense for many industrial users - whether they’re automakers building [electric vehicles (EVs)] or power grid managers - to purchase,” said Xiao Fu, head of commodities strategy at Bank of China International (BOCI) Global Commodities.

Physical difference
Premiums, a barometer for the physical market, have slumped in China.

A markedly lower SHFE price makes importing metal from outside considerably more expensive. Fastmarkets most recently assessed the copper grade A cathode ER premium, cif Shanghai at $38-43 per tonne on Wednesday May 5, less than half of top producer Codelco's annual offer of $88 per tonne.

Cathode in the domestic market is faring no better, and was last week trading at discounts of up to 265 yuan per tonne, its lowest level since February 2018, according to sources.



Physical premiums for copper cathode in Shanghai have slipped to six-month lows on worsening import appetites.

“When there's such a huge divergence, something is [clearly] wrong, and the market is screaming [about] that,” a Chinese fund manager who requested anonymity told Fastmarkets.

“We're just waiting for the time when there's a correction - that's something people are nervous about and it's why they're cautious on the price,” he added.

Information bubbles
But part of the difference may be hiding in plain sight, while those participating in a globally traded market find themselves very much stuck at home.

And swapping exchanging anecdotes over a business lunch for cries of “you're on mute” over Zoom has led to a split in information flow says BOCI's Fu, who works in London.

“It's interesting to watch this divergence emerging; back before the pandemic people could go to conferences and ideas would flow better, but now it's almost like there are two different universes,” she said.

“People in the West are talking to others in western financial institutions, while in China they are focusing on the industrial side. We're more siloed now in terms of information and mentality.”

Additional reporting by Ana de Liz in London