Copper: the squeeze is in visible stocks, not the price
Exchange inventories have fallen for eleven consecutive weeks while the curve has barely moved. That divergence rarely survives a quarter.
Marguerite Okonjo Head of Metals & Mining
Copper has spent the past two months behaving like a market that has been told something it does not yet believe. LME and COMEX visible stocks are down roughly 38% from the June peak, cancelled warrants are running at the top of their three-year range, and yet the cash-to-three-month spread has widened by only a few dollars. Either the physical market is wrong, or the financial market is late.
Our read is that the financial market is late, and the reason is straightforward: the drawdown has been concentrated in precisely the warehouses that index-driven positioning does not watch. Off-warrant metal in northern Europe and the US Midwest has been absorbed by fabricators running hand-to-mouth since the second quarter, so the headline tonnage understates how tight deliverable supply actually is. When a consumer needs metal next week rather than next month, the only place left to go is the warrant book.
The demand side is less exciting than the supply side, and we should say so plainly. Chinese grid spending has held up better than the property drag, but the incremental growth is modest. Our 2027 balance assumes global refined consumption growth of 2.4%, which is close to trend and not a bull case. The deficit we forecast, around 310kt, is generated almost entirely by mine supply failing to keep pace with that unremarkable demand number.
That is the part of the story that takes time to price. Three of the four large greenfield projects that were supposed to deliver between 2027 and 2029 have slipped a year or more, and the grades coming out of the Andean brownfields are running below plan. Copper is not short of ore in the ground; it is short of the permitting, water rights and grid connections needed to turn ore into cathode on any timetable that matters to a fabricator ordering next quarter.
For positioning, we prefer owning the 2027 curve rather than the front month. A squeeze in nearby spreads is a trade for people with warehouse relationships and a very high tolerance for being early; the structural deficit is a trade for people who can hold a view through a drawdown. We would add on any move back below $4.30/lb and treat the current consolidation as an entry rather than a warning.
The risk to this view is not demand destruction but substitution. Aluminium has already taken share in medium-voltage cable, and if copper holds above $4.80 for a full quarter we would expect the pace of that substitution to accelerate. That is a slow variable, though, and it operates on a two-to-three year horizon — long after the current warrant book has been exhausted.
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