Copper- New High and a Pullback- Problems At The LME

Before 2005, the nearby COMEX copper futures price never traded above $1.65 per pound. At the recent high, the price reached over triple the pre-2005 peak. Goldman Sachs called copper “the new oil” in 2021, projecting the price would rise to $15,000 per ton by 2025.  The $15,000 level on the London Metals Exchange three-month forwards equates to over $6.80 per pound on COMEX futures. 

While the CME’s COMEX division offers futures on copper, the world’s most liquid exchange is the LME. Flexibility leads producers and consumers of copper and other nonferrous metals to flock to the LME. Forward contracts settle each business day, while COMEX futures follow a monthly delivery schedule with the most active months in March, May, July, September, and December. The LME copper contract offers liquidity and flexibility for industrial companies hedging their output or requirements. 

Meanwhile, the recent problems in the nickel market could cause copper liquidity to suffer. As liquidity declines, price volatility often increases, which could make copper a lot more volatile over the coming months. 

Copper is the leading base metal

Copper is the most high-profile nonferrous metal. I have been in the commodities business since the early 1980s. Over the decades, many market participants have looked to copper as Doctor Copper, the metal with a Ph.D. in economics. It often diagnoses if the worldwide economy is expanding or contracting with its price action. 

Meanwhile, copper’s role has changed over the past years as it is a critical metal for addressing climate change. Goldman Sachs called copper “the new oil” in 2021 as EVs, wind turbines, and other green energy initiatives require ever-increasing amounts of the metal. 

In May 2021, copper rose to a new all-time high at $4.8985 per pound. Before 2005, the red nonferrous metal never traded above $1.6010 per pound. 

The long-term chart highlights copper’s rise to $4.27 per pound in May 2008 and its correction to a low of $1.2475 seven months later in December 2008. Since then, copper only probed below $2 per pound briefly in 2016 and has made higher lows and higher highs. In March 2022, copper reached another milestone when it traded above the $5 per pound level for the first time. 

Goldman Sachs’s analysts believe copper will move to the $15,000 per ton level by 2025, putting the nearby COMEX futures above the $6.80 per pound level. 

The COMEX futures market attracts speculators and hedgers, but the world’s leading copper exchange is the LME, or London Metals Exchange. 

China bought the LME in 2013

The LME has a long history and tends to attract producers and consumers that manage price risk. The COMEX copper futures a physical delivery mechanism when the March, May, July, September, and December contracts move into their delivery periods. Meanwhile, the LME three-month forward contracts in copper, aluminum, nickel, lead, zinc, and tin, offer settlements and delivery each business day. The LME’s flexibility makes it the most liquid hedging market worldwide. 

Like many exchanges, technical requirements requiring capital caused the membership exchange to seek a partner with deep pockets around a decade ago. The Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE) listed shares and went public to raise capital, and both were interested in buying the LME. 

Meanwhile, China is the demand side of the base metal’s market fundamental equation, and a Chinese company would up purchasing the LME in 2013. While the LME remains a London-based exchange, its owner is in Hong Kong, meaning Beijing pulls the strings. 

The nickel market imploded in early March

Rising inflation, increasing demand for battery metals, Russia’s invasion of Ukraine, sanctions, and retaliatory measures created a perfect bullish storm in the thinly traded LME nickel market. In March 2022, nickel moved to a new record high and spiked to the upside, creating a massive problem for the LME.  

The chart shows the explosive move that took nickel above the 2007 $51,800 high to $101,365 per ton. While the price pulled back to just above $45,500 on March 17, the exchange faces the most significant reputational issue since the 1985 tin crisis. 

Suspending trading is a dangerous precedent

A Chinese nickel producer lost billions when the nickel price spiked higher. The LME suspended trading and canceled the transactions during the price spike. The LME website continued to post the following message:

Source: LME

The exchange has been working with Tsingshan, the Chinese producer, JP Morgan Chase, who provided financing for the nickel producer, and its owners in Hong Kong to find a way out of the debacle. Tsingshan’s short position could be problematic as it produces a nickel grade and purity below the delivery specifications. We are likely to see the exchange change the rules and allow delivery to minimize the losses. 

Suspending trading is a severe reputational problem for the LME. Hedge funds, producers, consumers, and other market participants in the nickel, copper, aluminum, lead, zinc, and tin markets could limit their activities because of the debacle as suspending trading and changing the rules creates a dangerous precedent. Base metals are experiencing the most significant bull market in years, if not in history. The trading suspension comes at a bad time for the exchange. Moreover, China’s implied support for Russia in the war in Ukraine only compounds the problem.  The LME issue that causes market participants to limit their activities will cause liquidity to decline. 

Expect the bull market in copper to be a wild ride

Bull markets rarely move in straight lines. COMEX copper pulled back from over $5 to the $4.50 level and was at the $4.64 on March 18. Aluminum, nickel, and tin forwards also moved to new all-time peaks in March 2022 and pulled back from their highs. Zinc and lead forwards have moved to new multi-year highs. 

Inflation, labor shortages, supply chain bottlenecks, the war in Ukraine, sanctions, retaliation, and addressing climate change have created an almost perfect bullish storm for base metals. The nickel debacle is likely to cause liquidity to decline when prices are trending higher, and less liquidity exacerbates price variance. 

I expect the rallies in copper and base metals to continue to make higher lows and higher highs in the current environment. Meanwhile, the reputational damage to the LME may only serve to make the price action far more volatile over the coming weeks and months. Fasten your seatbelts for a wild ride in the metals that are building blocks for infrastructure and ingredients in the green initiative.