(Bloomberg) -- This year’s supply crunch in the US copper market is unwinding rapidly, with a flood of imports helping to fuel the biggest monthly surge in exchange inventories in more than twenty years.
Inventories underpinning Comex futures contracts jumped by more than 25,000 short tons in August. That followed a spike in prices on the exchange in May, which made it profitable to ship metal into the US from as far afield as China.
Overall US copper imports also surged over July and August, in a trend that’s helping to alleviate the chronic supply constraints that helped fuel the surge in prices.
Comex stockpiles remain low by historical standards, but futures contracts on the exchange are increasingly signaling that the market is amply supplied. Prices have fallen about 20% from the May peak, and spot contracts are trading at huge discounts to later-dated futures.
The front-month contract on Aug. 28 closed at a discount of 4.65 cents per pound to the second month, the widest level seen since Comex copper futures were launched in 1988. That’s a stark reversal from conditions during the May squeeze, when spot contracts spiked to trade at unprecedented premiums, with many buyers rushing to exit loss-making short positions that they wouldn’t be able to deliver against.
With nearby contracts now trading at a discount — or in a so-called contango — the commercial strains are shifting to bullish traders who hold long positions, many of whom had piled into Comex on a bet that global supplies would tighten as demand rebounded.
Periodically bullish investors need to roll forward the contracts they’ve bought forward as the futures approach expiration. However, the discounted spreads expose them to losses because they are selling back comparatively cheap spot contracts and buying more expensive later-dated futures.
On the London Metal Exchange and the Shanghai Futures Exchange — where inventories are much higher — bullish investors have faced that dynamic for months already. The appearance of the large contango on Comex only adds to evidence that the global market is very comfortably supplied.
Global copper contracts saw subdued trading on Monday, with many US markets closed for the Labor Day holiday. On the London Metal Exchange — which sets global benchmark prices — copper declined 0.6% to $9,177.50 a ton as of 11:30 a.m. local time.
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