SMM: Copper Prices soared amid Expanding LME Backwardation and Growing Inflationary Pressure

SHANGHAI, Oct 20 (SMM) - The copper prices surged again after the National Day holiday. The US dollar index fell below 94 from a high of 94.5. The US crude oil prices have jumped to $82/barrel after rising for more than one month, driving a rally in the global industrial product prices. The global copper inventories are at a historical low. The LME copper cash-to-three-month backwardation expanded rapidly to $257/mt after breaking through $100/mt, setting a new high since 2007. LME copper exceed $10,000/mt to a high of $10,300/mt, with a weekly increase of 9.25%.

Europe’s largest refined zinc producer Nyrstar decided to cut the output in the fourth quarter due to the soaring electricity prices and the significant increase in costs related to carbon emissions, heightening market concerns of inflation caused by the global energy crisis. The steep rise in the costs of industrial products will gradually be reflected through their prices. The market has generally accepted that the US Fed will start tapering its asset purchases in November or December. The macro front is unlikely to put downward pressure on copper prices in the short term, unless the Fed decides to raise interest rate or start tapering ahead of schedule, and the market inflation will continue. After US President Biden signed the bill to raise the debt ceiling, the House of Representatives has become the last obstacle. If the House of Representatives finally passes the bill, copper prices may still have upside room in the short term.

The low global copper inventory has become the largest driving force of higher copper prices.  As of October 15, LME copper stocks were 181,400 mt, and LME copper cancelled warrants were 167,250 mt, accounting for as much as 92% of the total inventory, causing the available copper stocks to fall to the lowest level since 1974. The LME copper cash-to-three-month backwardation exceeded $200/mt and later hit $257/mt in just a few days. From the perspective of domestic inventory, the inventory at the SHFE warehouses has also remained at a low level, while the inventory in Guangdong is close to zero. The warrants in China are just roughly 10,000 mt. In the context of the global COVID-19 pandemic, the ocean shipments and containers have been affected to varying degrees, causing a large number of industrial products and processed products to be stranded at ports. Despite the increase in undisclosed global inventory and no significant recovery of consumption, the overall inventory remains low. The price spread between copper cathode and copper scrap widened rapidly amid the soaring copper prices, leaving more copper scrap available in the market when compared with September. However, the supply of copper scrap remains tight and is still much lower than that at the beginning of the year. Copper scrap is unlikely to replace copper cathode on a large scale in the short term.

The copper prices have broken through all the technical resistance and are in an upward trend with the entry of longs amid positive fundamentals and macro front. If the LME copper backwardation structure is not effectively controlled and does not return to a normal level, the copper prices may still see slight upside room. The market should focus on how the market dynamics will change after the LME delivery date on October 20, which may bring the pivot. SMM estimates that SHFE copper will move between 71,000-76,500 yuan/mt in September and LME copper between $9,800-10,500/mt.