Short-term copper contracts are once again trading at a huge premium to futures in London, in a sign that last month’s unprecedented shortage of spot supply is far from over.
While futures prices are falling as demand prospects deteriorate, rising premiums for spot contracts point to a shortfall in supply on the London Metal Exchange, with inventories near a low of several decades. Premiums for spot contracts hit record highs last month, in a condition known as backwardation that indicates that spot demand is far outstripping supply.
As was the case during the October downturn, LME buyers are again paying huge premiums to renew first-month contracts. The spread between November and December contracts soared to $ 275 a metric ton at the close of business on Monday, in one of the biggest pullbacks ever seen in the stock market. The spread narrowed slightly to $ 160 at the close of business on Tuesday.
High spot premiums and declining supply of metals on the LME and other exchanges contrast with mounting concerns about demand that are dragging futures prices lower. Three-month prices have fallen 7.6% from last month’s peak, driven by a slowdown in manufacturing in China and rising debt risks in its real estate sector.
“It’s fair to say that there is something of a storm brewing for metals,” Malcolm Freeman, director of brokerage Kingdom Futures, said in an emailed note. “The key question is when will it break?”
The pullback in the front’s two monthly contracts rose to a record $ 1,060 a tonne during last month’s unprecedented contraction, prompting the LME to introduce emergency measures in a bid to restore order. While those steps may prevent backwardation from reaching such extreme levels again, buyers could still come under further pressure before the November contract expires in just under two weeks.
LME data shows there are still more than 17,300 contracts pending that will need to be settled before the November contract expires, meaning sellers will have to buy back the contracts or find copper to deliver to LME warehouses. . Open interest in the November contracts is 433,775 tonnes, almost 14 times the amount of metal available to buyers in the LME warehouse network.
Even as the pullback increased, copper and other base metals came under further pressure on Tuesday amid concerns about a slowdown in the Chinese economy and high inflation. While the global energy crisis continues to hold back metal supplies, the headwinds to China’s growth are mounting due to the energy crisis, real estate deleveraging and coronavirus outbreaks.
That is stoking concerns about the strength of the broader rally in commodities that pushed a Bloomberg commodity gauge and the LME index to record highs last month. Overall market sentiment soured as traders awaited key decisions from the central bank amid inflation concerns. The dollar changed shortly before a key meeting of the Federal Reserve, where an announcement is expected about plans to reduce its massive bond buying program.
LME copper fell 0.6% to $ 9,495.50 a metric ton at 5:53 pm local time, while aluminum posted a 1% drop, reversing previous gains of up to 1%.
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