ROI-Fund sellers, China buyers squeeze copper's tariff trade: Andy Home
Copper has been a casualty of the AI stocks selloff as investors scale back expectations for the much-hyped demand boost from data-center construction. The storm of selling that wiped $2.5 trillion in market value from the Nasdaq 100 on Thursday washed over both copper and tin, metals that are deeply embedded in physical AI infrastructure.
While US funds are selling, Chinese industrial users would love to buy. Shanghai copper stocks are depleted and import premiums are at record highs. The US tariff trade, which has seen CME prices command a premium over the London Metal Exchange (LME) contract on expectations of import tariffs, has sucked huge amounts of metal into the country and left everyone else short.
While the White House maintains a policy of strategic ambivalence about its intentions, fund sellers in the west and physical buyers in the east are combining to compress the arbitrage gap. FUNDS FLEE COPPER
Copper has been one of the metallic proxies for the AI investment craze for many months. Data center demand featured heavily in the talking points at last month's LME Week festivities. As the AI sector now reels, fund managers are rapidly cutting long positions on the CME copper contract.
The investment community had built up a net long position of 82,649 contracts by the middle of September, the largest cumulative bet on higher prices since 2021. That bet now stands at a much-reduced 34,444 contracts, according to the latest Commitments of Traders report, which doesn't capture the worst of the rout at the end of last week.
Outright long positions have collapsed from 96,824 contracts in mid-September to 58,475 as funds rotated out of the metal. LOW STOCKS, HIGH PREMIUMS
Meanwhile, stocks registered with the Shanghai Futures Exchange (ShFE) have crashed to a three-year low of just 33,848 tons. The Yangshan copper premium
The gravitational pull of the US premium has both diverted flows away from the world's largest physical buyer and emptied bonded warehouses at its ports. The Yangshan premium floats above the LME cash price, which has also risen sharply because the London market is tight as well.
LME cash copper is trading at a $195-per-ton premium over three-month metal
CME warehouses account for over 60% of global exchange stocks. The US share, including LME warehouses in the country, is 85%. The result is a paper squeeze on the London market and a physical one in mainland China.
MINDING THE NARROWER GAP The CME spot premium over London briefly flipped to a discount last week. It's now back at $80 per ton but that's much reduced from August, when it was over $700.
The market was becoming less convinced about the prospect of US import tariffs even before the midterm elections. Given the big role the cost of living played in the sweeping Democratic victory, expectations are being dialled back further. The narrowing arbitrage window is already causing metal flows to shift.
Copper continues to arrive in the US at a brisk pace. Another 200,000 tons were imported in August, bringing the year-to-date total to 1.3 million tons, according to the World Bureau of Metal Statistics, which collects official customs data. What's changed is the split in delivery between customs-cleared CME warehouses and those operated in bonded zones by the LME.
CME stocks have risen by 27,000 tons since the start of October. LME registered stocks have seen 107,000 tons of deliveries over the same period. There are another 62,000 tons of copper sitting in LME off-warrant storage at US locations. The flaring out of the LME cash premium has overridden the financial incentive to clear newly arrived metal through US customs.
Whether the copper now piling up at LME warehouses in the US makes it through a customs checkpoint or turns around and leaves depends on just how much Chinese buyers are prepared to pay for their copper. (The opinions expressed here are those of Andy Home, a columnist for Reuters.)
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(Writing by Andy Home; Editing by Marguerita Choy)
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