Copper Short Squeeze in New York Is Rocking Metals Markets

A massive dislocation between the prices for copper traded in New York and other commodity exchanges has rocked the global market for the metal and prompted a frantic dash for supplies to ship to the US.

The source of the disruption is a short squeeze that has driven up prices on the Comex exchange in recent days. The premium fetched by New York copper futures above the London Metal Exchange price has rocketed to an unprecedented level of over $1,200 per ton, compared with a typical differential of just a few dollars.

The blowout in that price spread wrong-footed major players from Chinese traders to quantitative hedge funds, some of whom are now scrambling for metal that they can deliver against expiring futures contracts.

The wild swings highlight how commodity markets can spiral rapidly out of control when market participants are no longer able to finance their positions — a situation that becomes more likely amid the low inventory environment and logistical snarls that commodity traders have faced in everything from nickel to cocoa in the past few years.

The volatility on Comex also reflects a surge of interest from speculators after forecasts that long-term copper mine production will struggle to keep pace with demand. While less important than the LME, Comex, which is part of CME Group Inc., is a key playground for investors, some of whom have used the exchange to build up large bullish bets on copper in recent months.

“The broader story is that there are new investment funds that are boosting their exposure to copper for a multitude of reasons, and while that’s a global trend, a huge amount of that investment has been heading to Comex,” said Matthew Heap, a portfolio manager at Orion Resource Partners, the largest metals-focused fund manager.

While copper prices have been rising for months, this week’s spike was specific to the Comex and the most-active futures contract for July delivery. By Wednesday, the July price had soared as much as 10%, touching a record high for that contract, even as the global benchmark contract on the LME traded broadly flat.

The move, according to numerous traders and brokers, was a classic short squeeze. Market participants who had placed bets on the Comex contract moving back into line with prices on the LME and in Shanghai, the other global copper benchmark, were forced to buy those positions back as prices rose, creating a vicious cycle.