When copper began to climb at the start of May, the first explanation on most London trading desks was that someone had been caught short. The benchmark three-month price rose 11% over eight sessions, by the closing prices our desk tracks, with no mine closure, no strike and no new buyer anyone could name.
"It looked like a fund getting squeezed and paying up to get out," said Inés Barrachina, head of base metals at Harwick & Lowe, a London broker. "We told clients to wait for it to fall back." Three weeks on, most of the gain is intact, and the traders who waved it away are asking what they missed.
Eight sessions
The move came in two bursts. The first four sessions added 6% on thin volume, the kind of rally that usually fades once liquidity returns. The second leg came on heavier trade and pushed the nearby contract to a steep premium over three-month metal. When copper for delivery now costs more than copper for delivery later, somebody usually needs metal now.
Options traders noticed it before the futures desks did. Demand for calls two and three months out rose sharply in the second week, according to two option brokers who asked us to describe the flow but not their clients. "Somebody was paying for protection against a higher price in the summer," one said. "That is not how a fund behaves when it is trapped in a short. That is how a fabricator behaves when it is worried."
Why the desks shrugged
The case against the rally was a reasonable one. Demand figures from Asia had been soft since the winter. Smelters had added capacity faster than mines had added ore. And brokers' chatter pointed to a single large holder of nearby warrants, which is how squeezes tend to start.
"Every copper rally for two years has been a trade, not a shortage," said Oliver Stamm, a fund manager at Bellgate Capital in Zurich, who sold into the first leg. "I assumed this one was the same."
What the warehouses said
Physical traders saw something else. Rodrigo Pizarro, who buys cathode from mid-size Chilean mines for the Santiago merchant Andina Metales, said his customers in southern China had stopped bargaining over premiums in April. "When a buyer stops arguing about twenty dollars, he is worried about getting the metal at all," he said.
In Rotterdam, the premium a buyer pays over the exchange price for delivered cathode rose to $220 a tonne in our survey of four merchants, from $140 at the end of March. Stocks in registered warehouses fell by about a quarter over the month, by the same merchants' count, and more of what remains is already earmarked for delivery.
Supply with no slack
No mine closed, but several stumbled. Minera Los Arcos, in the Atacama, pushed back the start of its new concentrator by a quarter. A smaller operator in Peru lost ten days to a blocked road. None of these would move the price alone. Together, they took away the spare tonnes that usually absorb a rush of buying.
Those tonnes matter more than they used to. Ore grades at older mines in Chile have been falling for a decade, so each new tonne of copper needs more rock moved, more water and more power. A delay that would once have been covered by a neighbour's surplus now shows up in the warehouse within weeks.
Who is right
Ms Barrachina has changed her advice. "The physical market was tighter than any of us had in our spreadsheets," she said this week. Her desk now expects the price to hold most of its gain into the summer.
Mr Stamm has not changed his. He expects the price to give back most of the move once two new smelters in Asia reach full rates and their demand for concentrate is met. He has kept his position small. "I have been wrong about copper before," he said. "Never for very long."
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