A painful day for the copper market

Did the copper roll just get squeezed? The market took a big hit Tuesday. Around the world everyone is still recovering from the massive losses.

A source who declined to go on record stated that the squeeze came from a Swiss trading house who stopped out. Closed their exposure over July-Sep, this is said to be the main driver. This caused a lot of traders to get caught in the crossfire.

We witnessed prices rallying in both Comex and the London Metal Exchange (LME), an arb between the two (starting out at 21) and a backwardation (up towards 30).

In hockey, this triple play would be considered a hat trick. In the copper market, this triple threat, that occurred all in one trading day, should be dubbed the CopperCurve Convergence. Nonetheless, those in the copper market felt the pain one way or another.

Comex copper prices hit a high north of $5/lb. The market was stunned when the LME rallied to $10k/mt, so what do we call today’s volatility? The rally that hit up to $10,200/mt.

Who’s feeling the pain?

What type of traders will be hurting the most from this copper circus we witnessed today? Traders and brokers holding short positions will end up paying the price to unwind their positions. The recycled copper community also felt the pain, particularly those who committed to spreads and had yet to price it. Or the exporters that engage in the arb. Even China’s approach appears to be characterized by a degree of complacency. However, their current stance is proving to be financially detrimental, as they are experiencing significant losses in the copper arb.

There was just no preparing for Tuesday’s market. Massively overexposed with losses said to hit upward of $100 million. Nearby contracts commanding unprecedented premiums over later-dated futures, signaling a state of backwardation that often indicates a tightening of supply. In particular, the backwardation between Jul/Sep Comex reaching 2900 points. And forget June as it’s a liquid month.

So what now?

Investors are particularly bullish on copper, considering its vital role in key sectors associated with copper supply. The market’s volatility underscores the delicate balance between supply and demand. While the investment pipeline for new mines is crucial, the long lead time to develop them presents a challenge in addressing sudden price spikes.

Despite this, the growing demand for copper suggests a promising outlook, with potential for continued price appreciation in the future.

I know, the question has crossed my mind as well; how could anyone look at this copper market and be able to attempt any type of outlook? I wish I had the answer for you, but it’s too early in the game to do so, let alone price it, as I’m sure the remaining week will show a lot of people being out of the market.

Amidst the trifecta that occurred on Tuesday, May 14th, Comex has been actively investigating late trades that were done at the close. Two trades were executed at market close at similar quantities (both around 4k lots) and were issued by two different brokers, raising a red flag. It is an odd move to be considered a strategy, as this type of trading would be against market rules and would uphold a hefty fine.

These late trades have led to speculation and scrutiny within the copper market, raising questions about their impact on price discovery and market integrity– and, of course, adding to the already confused market.

CME open interest is at 316k lots. July is 177k. Tightness has played out on the CME market.

Stay tuned for further updates.