LME & COMEX Copper Price Spread Hits Historical High Again: What's Driving It? [SMM Analysis]

Published: Jan 10, 2025 12:34

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[SMM Analysis]: In May 2024, due to ultra-low COMEX copper inventories, a historically rare short squeeze occurred in the COMEX copper market. A large influx of funds went long in the COMEX copper futures market, creating a squeeze on arbitrage funds and hedging enterprises already in the market. The intraday price spread between LME and COMEX copper once exceeded $1,000/mt, with the cross-market price spread widening to extreme levels. Traders began transporting copper to US warehouses to profit from the ultra-high price spread and alleviate the pressure from the short squeeze, leading to a gradual rebound in COMEX copper inventories. By January 9, 2025, the intraday premium of COMEX copper over LME copper exceeded $600/mt, nearing historical highs. Meanwhile, COMEX inventories reached historical highs, making it difficult for fundamentals to support such a large price spread. What is the reason behind this?

In May 2024, due to ultra-low COMEX copper inventories, a historically rare short squeeze occurred in the COMEX copper market. A large influx of funds went long on COMEX copper futures, pressuring arbitrage funds and hedging companies already in the market. The intraday price spread between LME and COMEX copper once exceeded $1,000/mt, with the inter-market price spread widening to extreme levels. Traders began shipping copper to US warehouses to profit from the exceptionally high price spread and alleviate the pressure from the short squeeze, leading to a gradual rebound in COMEX copper inventories.

By January 9, 2025, the intraday premium of COMEX copper over LME copper exceeded $600/mt, nearing historical highs. Meanwhile, COMEX inventories were at record levels, and the fundamentals could hardly support such a large price spread. What was the reason behind this?

On January 6, 2025, The Washington Post reported that aides to US President-elect Trump were exploring a tariff plan applicable to "all countries" for key imported goods. This contradicted Trump's campaign stance. Notably, on November 25, 2024, after his election victory, Trump stated that he would impose an additional 10% tariff on all imports from China on his first day in office. In response to The Washington Post's January 6 report, Trump dismissed it as "another fake news" and asserted that his tariff policy would not be scaled back.

Note: The price spread between the two markets is calculated based on the futures closing prices and is for reference only.

Ahead of Trump's inauguration on January 20, under expectations of a "universal" tariff of 10% or 20%, or even higher, financial markets were filled with uncertainty about the potential impact of his trade policies. COMEX became the preferred choice for speculative capital targeting certain US commodities, driving a new surge in the price spread between the two markets. This could lead some copper traders to engage in inter-market arbitrage by buying LME copper futures contracts while selling COMEX futures, which would cause the price spread to narrow.

According to SMM, some traders locked in price spread profits by shipping copper from South America to the US. However, other traders were concerned about the potential for further extreme widening of the price spread due to the anticipated impact of tariffs and other new policies, which could result in losses. In the Chinese market, the availability of deliverable copper sources for COMEX is relatively limited. Considering transportation distance, time, and financial costs, the operational space is relatively small. As arbitrage positions enter the market, the price spread between the two markets is expected to gradually narrow. In the future, COMEX copper warehouse inventories may continue to grow, but based on US copper consumption expectations, this is unlikely to exert pressure on its fundamentals.

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Data Source Statement: Except for publicly available information, all other data are processed by SMM based on publicly available information, market communication, and relying on SMM's internal database model. They are for reference only and do not constitute decision-making recommendations.

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