Comex copper has been extremely crowded recently, why are bulls so confident?

Source: Citic Futures Shen Lighting, etc.

(1) low global copper inventory; (2) low Comex copper inventory and high position in Comex copper contract in July; (3) low LME copper inventory, and most of it is Russian copper and cannot be delivered in Comex copper; (4) Chinese copper brand is not Comex copper delivery brand; (5) China's sea freight to North America is significantly higher, and the export freight cost of refined copper is higher; (6) speculative demand increases under the background of global copper shortage. 7. The sad story repeats itself every few years-Chinese companies or institutions have exposure to Comex copper.

Starting from the week of May 10thCryptogamecoinWe found that the Comex copper squeeze event is getting hotter and hotter, and the squeeze event is becoming more and more extreme. In the week of May 17, various spreads related to Comex copper reached an all-time extreme, and the Comex copper July contract was the first to hit an all-time high.

The extreme overrun of Comex copper is mainly caused by the following reasons: (1) low global copper inventory; (2) low Comex copper inventory and high Comex copper contract position in July; (3) low LME copper inventory and most of it is Russian copper and cannot be delivered in Comex copper; (4) Chinese copper brand is not Comex copper delivery brand; (5) the sea freight from China to North America is significantly higher, and the export freight cost of refined copper is higher. 6. Speculative demand increases against a backdrop of global copper shortage. 7. The sad story repeats itself every few years-Chinese companies or institutions are exposed to Comex copper.

Comex copper has been extremely crowded recently, why are bulls so confident?

The sharp rise in COMEX copper prices to some extent implies the premium brought by the risk of overrun. From the term structure of COMEX copper, the spread structure has rapidly changed from Contango to Backwardation this week, and the rising water has been rising in recent months. We analyze and summarize the reasons for the recent squeezing of COMEX copper as follows:

1. Global copper explicit inventory is low.

In the past ten years, the fluctuation range of copper inventory in the three major exchanges + Shanghai bonded warehouse is mostly between 50-1 million tons, but after 2021, we find that the explicit copper inventory has obviously moved down, and the fluctuation range has dropped to 20-600000 tons.

2. Comex copper inventory is low, Comex copper July contract position is high.

The current Comex copper inventory is only about 20, 000 tons, which is at a very low level in history. However, the July contract position of Comex Copper is too large. As of April 16, the contract position of Comex Copper in July was about 16.Cryptogamecoin.20,000 hands, equivalent to 1.84 million tons, the ratio of deficiency to reality is too large, which is the root cause of the squeeze. We see that the historical Comex copper July contract and Comex copper inventory ratio is between 0 and 20 most of the time, but it began to break through the range of 20 in mid-March this year, breaking through the value of 50 in mid-late April this year, that is, it is even higher than the peak in May 2023, and recently approaching 100. in the context of the extremely high ratio of reality to reality, it has directly triggered the current crowding phenomenon, which is estimated to be difficult to alleviate or disappear in the short term.

3. LME copper inventory is low, and most of it is Russian copper, so it cannot be delivered in Comex.

As of May 16, LME copper inventory was about 10.CryptogamecoinAlthough it has rebounded from the 2023 low, we see that this inventory level is still on the low side, and LME copper inventory levels are at historically low levels over the past decade. As of the end of April 2024, according to LME sub-regional copper stocks, Russian-branded copper and Chinese-branded copper were 47000 tons and 16000 tons respectively, accounting for 50% and 17% of LME's total inventory, or 67%, which means thatCryptogamecoinHis country's brands are only 31000 tons, accounting for about 33 per cent of LME's copper inventory. Thus it can be seen that the inventory of LME copper that can actually be delivered to Comex copper is extremely limited.

4. Chinese copper brand is not Comex copper delivery brand.

In addition to the low level of COMEX copper inventory, the setting of the New York Mercantile Exchange delivery brand limits the number of COMEX copper deliverables. Comparing the copper futures deliverable brand lists of Shanghai Futures Exchange (SHFE), London Metal Exchange (LME) and New York Mercantile Exchange (COMEX), we can find that among the 57 deliverable brands announced by COMEX Copper, the copper brands mainly concentrated in the United States, Canada, Chile, Japan, Peru and South Korea do not cover Chinese-made copper. Among the LME delivery brands, 25 Chinese copper enterprises are registered. Including Jiangxi Copper, Yunnan Copper, Tongling Nonferrous and other well-known enterprises. Therefore, although the current domestic storage is more than 400000 tons, it is not used for delivery in North America.

5. China's sea freight to North America is significantly higher, and the export freight cost of refined copper is higher.

As China's exports to the Americas are more active, the sea freight of China's exports to the United States has risen sharply in the past month or two, and the freight per ton has climbed from about US $100 to about US $300. This makes it more expensive for China to export refined copper to the United States, and it is difficult to cash in real export profits.

6. Speculative demand increases under the background of global copper shortage.

There are many disturbances in copper production in 2024. The world's 13th largest copper mine was unexpectedly shut down at the end of 2023, a Brazilian court suspended the operation license of Vale's Sossego copper mine, Zambia faced power shortage, and some products produced by the COMMUS SAS copper-cobalt mine in the Democratic Republic of the Congo were found to have excessive radiation levels, which led to the mine being shut down, and BHP proposed to acquire Anglo-American resources in late April to strengthen supply-side concerns. On March 13, the China Nonferrous Metals Industry Association organized a forum for copper smelting enterprises in Beijing, calling on domestic refineries to reduce production. On March 28, the CSPT group once again advocated joint production reduction. Two public calls to reduce production to strengthen the expectation of tight transmission from the mine end to the smelting end.

From the perspective of the global copper production cycle, the new output of the global copper mine from 2024 to 2026 is relatively small, the scale of the new production capacity of copper smelting at home and abroad is relatively large, the copper mine returns to a tight trend, and the latest spot TC of copper concentrate has fallen to negative value. The constraint of the tight end of the mine on the supply side will be difficult to solve in the next 1-2 years. Expectations of monetary policy easing by major central banks and supply-side disturbances have driven copper bulls to start ahead of the Lunar New year. In the context of the optimistic trend of copper prices, it will also lead to an increase in speculative demand in the market, making some copper mines and refined copper solidified or invisible, further aggravating the risk of market crowding.

7. The "sad story" repeats itself every few years-Chinese companies or institutions have exposure to Comex copper

Looking at the past decade or two, no matter how Chinese-funded companies or institutions engage in internal and external arbitrage or hedging, some "sad stories" will always emerge every few years, such as the 2018 Rusal sanctions incident, the 2022 Russia-Ukraine conflict. The Lenni incident in the context of the conflict and so on. Once a Chinese company or institution fails to discover subtle changes in the market in a timely manner, but operates a relatively large number of "regular business operations" based on ordinary experience, such as reverse hedging of internal and external markets under statistical arbitrage, etc., then once a supply disturbance problem occurs overseas, it will be very It may cause extreme squeeze events. This is also the helpless reality of the occurrence of "sad incidents". Companies participating in external markets must pay attention to risk control while maintaining a keen and awed attitude towards the market.

This article is taken from the CITIC Futures report: "Comex Copper has been extremely crowded recently. Why are the bulls so confident?" Authors: Shen Zhaoming, Li Suheng, Zheng Feifan, Zhang Yuan, He Yan

Shen Lighting Qualification No. F3074367

Li Suheng Qualification Certificate F03093505

Zheng Feifan Qualification Number: F03088415

Zhang Yuan Qualification No.: F03087000

He Yan Qualification No.: F03128282