In recent days, a significant short squeeze in the copper futures market has led to some reprieve for investors at the Chicago Mercantile Exchange (COMEX) following a relentless upward surgeOn May 21, the copper futures experienced a peak before retreating, hitting a low of $5.01 per pound after reaching an all-time high of $5.19 per pound on MondayMeanwhile, the London Metal Exchange (LME) saw a slight decline of 0.7%, with prices dipping to $10,768 per ton, while inter-market price spreads continued to converge.

According to Gong Ming, the Deputy Director of the Jinrui Futures Research Institute, the easing of price spreads has alleviated concerns surrounding the U.Sshort squeezeFurthermore, the inverted monthly spread structure at LME has notably narrowed, along with an increase in exports, indicating that goods are starting to flow from the Chinese and European markets to the United States

This could provoke a rebalancing of supply and demand across different regions; however, due to current transportation inefficiencies, the rebalancing process may take longer than anticipated.

Despite this pullback, the dramatic rise in copper prices continues to exert pressure on the industrial chainAn industry source noted that there are difficulties in sourcing copper on the spot market, and hedging efforts have been hindered, leading to varying degrees of losses among trading parties.

Analyst Wang Yunfei from Haitong Futures stated that the unprecedented surge in copper prices has plunged certain downstream industries in China into serious financial distressThe overwhelming demand for capital has exceeded project budgets, making it exceedingly challenging to advance projects, with some stalling entirely, thus adversely affecting established production plans.

In analyzing Tuesday's minor retreat in prices, Zhu Bin, the Chief Economist at Nanhua Futures, argues that this does not signify a peak in copper prices

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He explained that the current market is characterized by tight supply, which is a critical factor driving prices upwardUntil the supply issue is resolved, copper prices are likely to continue their upward trajectory, with any sharp downturns only possible in the event of significant negative news from the fundamentals.

The current spike in copper prices has inflicted significant chaos along the spot market supply chain globallyThe same industry insider noted that while upstream copper mines enjoy profitability from higher prices—allowing them to exploit lower-grade ores and enhance their economic resource base—midstream smelting operations face considerably different challenges.

In detail, the smelting industry predominantly relies on processing fees for profits and does not benefit directly from rising copper pricesIn fact, escalating prices require more working capital, leading to increased financial liabilities and exposure to price volatility, coupled with performance risks from downstream clients

Notably, the rise in copper prices has been accompanied by a drop in processing fees for single orders, further intensifying operational stress for smelters.

The situation becomes even more complex for downstream processing industriesMany sectors linked to electricity, like wire and cable manufacturing, are coping with fierce competition and capacity saturation, putting them under significant operational pressureThe surge in copper prices amplifies procurement costs, negatively impacting operational efficiency and export competitivenessSome processing enterprises are scaling back on procurement or halting production altogether due to heightened capital needs and price volatility risks.

Wang Yunfei elaborates that the substantial rise in copper prices has multifaceted impacts on Chinese enterprisesFirst, there’s an increase in daily capital occupancy; while production firms generally have adequate financial arrangements, the sharp rise in raw material prices has escalated operational capital needs

Furthermore, some businesses relying on hedging have had to deal with unrealized losses on futures contracts, intensifying financial pressuresSecond, regarding sales of spot goods, heightened demand for capital has caused a slowdown in order fulfillment, with small and medium-sized enterprises reducing purchase volumes, resulting in inventory accumulation that, if prolonged, could jeopardize cash flow and leave smaller copper processing firms at risk of cash flow disruption.

Since the beginning of 2024, copper prices on the Shanghai and London exchanges have surged by 26.7% and 27.3%, respectivelyThe climbing costs of raw materials have severely impacted the performance of publicly listed companies in China's home appliance sector.

For instance, the first quarter report of Robam Appliances (002508.SZ) revealed a net operating cash flow of 54.8876 million yuan, a significant decline of 69.8% compared to the previous year

Huatai Securities pointed out that Robam's gross profit margin hit 50.65%, down 4.14 percentage points year on year, primarily due to the rise in raw material prices relative to the same period last year.

Similarly, Supor (002032.SZ) experienced a decline in its gross profit margin for the first quarter, dropping by 0.8 percentage points to 24.42% year over yearIn Gree Electric's (000651.SZ) annual report for 2023, they also acknowledged the impact of fluctuating raw material costs, noting that their primary materials include various grades of copper, steel, aluminum, and plastics, all of which constitute a significant part of the main business costs.

Amid persistent supply deficits, the market consensus appears to be that levels of $11,000 per ton are not the ceiling for copper pricesGlobal copper supply is facing severe hurdles, offering robust grounding for price increases

The COMEX copper futures’ leading contract indicated a substantial upward trend starting May 9, striking a peak of $5.128 per pound (approximately $11,300 per ton) on May 15 and continuing to set successive historical records thereafter.

By May 21, COMEX copper futures accumulated a month-to-date gain exceeding 12%. Concurrently, LME copper futures achieved $11,104.5 per ton on Monday, with Shanghai copper soaring to an all-time high of 88,940 yuan per ton as well.

Industry experts unanimously regard copper prices as more prone to upward swings than declines in the short termAccording to research from the Hedging Research Academy, positioning and inventory levels are crucial indicators for the short-term price movements of commoditiesThe existing structure of COMEX copper futures highlights a troubling discrepancy between low inventory levels and high open interest positions

At present, the volume of goods slated for delivery by July remains scarce compared to the substantial positions held.

The Commodity Futures Trading Commission (CFTC) data shows a rising proportion of non-commercial long positionsAs of the week ending May 7, the net long positions in COMEX copper futures rose by 4,584 contracts to total 62,648 contracts, accounting for 20.8% of the overall open interest, with total open positions reaching 300,392 contracts—an uptick of 6,900 contracts, or 2.35% week-over-week, across 372 total traders.

According to research from CITIC Construction Futures, both Chinese and international copper prices have hit record highs, breaching 88,900 yuan per ton and the $11,000 markGiven the performance of COMEX copper amid profit-taking sentiment, both Shanghai and LME copper will face profit-taking selling pressure following their historical peaks.

In the long term, copper mine supply remains constrained, with consumption potential for improvements still intact

The same industry source believes that amid global economic fluctuations and escalating de-globalization trends, nonferrous metals have become hotspots for speculative investmentAlongside continued support for the Chinese economy and the rapid growth of new industries, particularly in electric vehicles and solar power, demand for copper has surged significantly.

Analyst Ji Xianfei from Guotai Junan Futures suggests that low overseas copper inventories, combined with a strong bullish sentiment, will continue to push COMEX copper prices higher, which will likely have reverberations in the Chinese marketOn a macroeconomic scale, April saw easing inflation rates in the U.S., leading the swap markets to adjust expectations regarding the Federal Reserve's interest rate cuts within the year, causing the U.Sdollar index to retreatConcurrently, favorable policies in China's real estate sector have improved market sentiment surrounding real estate enterprise debt risks and capital flows.

In the current climate of massive capital influx and escalating prices, it is challenging to determine how much more upward potential exists for copper prices