Large Operators Have Played To Break The London Market
The copper market is trying to get back to normal after it panicked this week with spot prices skyrocketing as reserves plummeted. The London Metal Exchange (LME) has taken drastic measures to prevent large traders from charging their purchases against the stock of the market manager.
The spread between the spot purchase versus the three-month future plummets from $ 1,000 on Tuesday to $ 247 at the end of the week. Operators have been playing the ‘squid game’ with LME for months to take their warehouses out of stock.
The game in the copper market is about leaving the London Stock Exchange without physical reserves. The free rise in the spot price and the drop in LME physical reserves to 15,225 tons, the 1974 lows , led to the futures discount exceeding $ 1,000 .
The very nature of the market favors speculative attack. Anyone who has a contract until its expiration becomes the owner of a metal package in an LME warehouse. Typically, futures contracts include investors and copper buyers, who use them to hedge against potential price increases in the spot market.
The problem has arisen when large copper traders have entered the futures market to attack LME reserves and create a great illusion of a physical copper shortage in the world. Reserves are also shrinking at the speed of light in other markets such as China and the US, hitting all-time lows. As reported by Bloomberg this week, the main person in charge of this type of operations has been the Swiss Trafigura, the largest commodity operator in Europe.
Total requests to withdraw more than 150,000 tonnes of copper from LME warehouses in the last two months have practically depleted the stock available on the exchange. Trafigura requests represent a high percentage. The company says that the high volume of copper is necessary to meet the demand of its customers.
On paper, the voracity of operators responds to the need to ensure supplies from the risk of shortages. “Copper bulls are back, while earlier this year the bull market mood had been fueled by fears of long-term undersupply, today’s narrative is about short-term shortages.” explains Carsten Menke, an analyst at Julius Baer. But the expert distrusts the reasoning that “the world is running out of copper.”
Physical traders have jumped into the financial arena to squeeze the bull market for copper
“This is an inventory game in which physical traders are participating,” denounces the analyst. “Physical operators make reserves disappear that most likely will never reach the manufacturers,” he says. Physical traders have entered the financial arena to squeeze the bull market for copper by acquiring futures contracts in the past to enter the LME vault. “This behavior occurs when the market is at its maximum peak or very close to it,” he adds.
The data supports this feeling. At the beginning of September, LME had reserves of 200,000 tonnes of copper. The Stock Exchange, given the delicate situation, was forced to announce an investigation and take emergency measures to guarantee the functioning of the market, that is, to move to avoid running out of stocks and that futures contracts have their physical counterpart.
It has forced large holders to lend their stocks when selling futures contracts, it has temporarily limited the copper spot price relative to the future price, and it allows deferred deliveries on short positions. The objective is to try to reduce the demand on your reserves.
“This is an unprecedented situation and we have not seen anything like this in the recent history of the copper market,” says Robin Bhar, an independent consultant to Bloomberg . “These measures are draconian, but they are necessary.”
The London Stock Exchange already knows what it is facing with nickel-like attacks
This is not the first time that LME has intervened in the metals market. In 2019, the exchange launched a similar investigation when a flood of orders to withdraw nickel reserves caused a disproportionate rise in price. In 2006, amid soaring nickel prices, it imposed a $ 300 cap on the cash premium going forward. And in 1992, when Marc Rich tried to corner the zinc market, the LME made decisions similar to this week.
For Colin Hamilton, analyst at BMO Capital Markets, it is difficult to repeat an episode similar to Tuesday, with spot prices skyrocketing. They came to exceed $ 11,300. Copper prices have risen 12% in the last month and are trading near $ 10,700.
The situation remains delicate for LME in the absence of confirmation next week if its measures have been effective. The spread between cash and the three-month future is still very high. The average for the last five years is around $ 13 .