By Eric Onstad and Julian Luk
LONDON (Reuters) - Copper's lightning rally to record highs may not be sustainable in the coming weeks, with action concentrated on the shipment of material to cover exposed short positions in the U.S. Comex futures market rather than tepid demand in top consumer China.
Prices on the CME Group's (NASDAQ:CME) Comex hit a record last week, while benchmark copper on the London Metal Exchange (LME) rocketed on Monday to an all-time peak of $11,104.50 a metric ton, having surged 28% so far this year.
Analysts say copper's long-term fundamentals are strong, with a bullish outlook attached to firm demand in coming years for applications including the global clean energy transition and greater use of artificial intelligence (AI).
That is set against constrained supply, prompting a race among miners for high quality projects.
The current run higher appears to be on shaky ground, motivated by heavy speculative activity and a dash to cover large short positions - which can be bets on lower prices, or producers hedging their output - taken by traders.
At least 100,000 metric tons of copper are en route to the U.S. CME exchange, two sources with direct knowledge told Reuters on Monday, which will go a good way to allow parties to deliver against bearish positions and take the heat out of the market.
"At the moment, it's pure speculative rather than real demand," said Robert Montefusco at broker Sucden Financial.
"It all depends on whether that demand becomes real, because once the specs are out, it'll just fall away."
On Comex, there was a total net short position of 7,525 contracts or 85,334 tons, data showed on Friday.
There was a big difference however between the net long position of speculators at 72,785 contracts (825,382 tons) and the net short position by producers of 91,502 contracts (1.04 million tons).
SHIPMENTS FROM SOUTH AMERICA
Sources have told Reuters that commodity traders including Trafigura and IXM, as well as Chinese copper producers, are among those caught in a short squeeze on Comex.
Many of those shorts have arranged for copper shipments to the U.S., from producers in Chile and Peru, re-directed vessels that had been headed to China on long-term contracts, and some copper withdrawn from LME warehouses.
More than 20,000 tons from Chile are expected to arrive in the U.S. by the end of May, with bigger volumes lined up to land in June and July, two producer sources said.
The transfer of copper from LME-registered warehouses to Comex however could be limited. Chinese and Russian copper, accounting for 67% of LME stocks, are not eligible for Comex delivery.
There are 17,250 tonnes of copper produced in Chile, Peru and Australia which are U.S. duty-exempt and were in the LME system at the end of April, exchange data showed.
CHINESE CONSUMERS, SMELTERS HOLD BACK
Consumption in China, which accounts for about half of global copper demand, is lacklustre due to a troubled property sector and industrial consumers that are baulking at record prices.
China on Friday announced "historic" steps to stabilise its crisis-hit property sector, but it will take time for a sector that is usually a big consumer of industrial metals to rebound.
For the time being, signals are gloomy, with the Yangshan copper premium, which reflects demand for copper imported into China, hovering at zero after sinking to negative $5 a ton last week, compared with $60 in March.
"Given significant financial length in copper and persisting slack Chinese fundamentals for the time being, we think there remains the risk that investors lose some patience with the story," JPMorgan analysts said in a note on Monday.
"In our view, this could ultimately be a very healthy correction that acts to kick start Chinese demand out of its stupor."
Much potential Chinese demand is on hold and could kick in at lower prices, JPMorgan added.
Investors and analysts are still bullish for the medium and long term due to rising global demand and disruptions to mine supply.