The Zhitong Finance App learned that the huge mismatch between copper prices traded in New York and other commodity exchanges shocked the global copper market and prompted people to frantically buy copper shipped to the US.

The root cause of this confusion is that the bearish squeeze in recent days has boosted the price of copper on the New York Mercantile Exchange (Comex).

The premium for New York copper futures over the London Metal Exchange (LME) price has soared to an unprecedented level of over $1,200 per tonne, while the usual spread is only a few dollars.

The sharp widening spread has caught major players from Chinese traders to quantitative hedge funds by surprise. Some of them are scrambling to buy this metal so that futures contracts can be delivered when they expire.

This sharp fluctuation highlights that when market participants are no longer able to fund their positions, the commodity market may rapidly spiral and get out of control, which is more likely to occur in a low inventory environment and logistics chaos. Commodity traders have faced this chaos over the past few years in everything from nickel to cocoa.

Fluctuations in the New York Mercantile Exchange also reflect a surge in speculators' interest after predicting that long-term copper production would be difficult to meet demand. As part of the Chicago Mercantile Exchange Group (CME Group), the New York Mercantile Exchange is not as important as the London Metal Exchange, but it is also an important place for investors to invest. Some investors have used the exchange to bet heavily on bullish copper in recent months.

Matthew Heap, portfolio manager at Orion Resource Partners, the largest non-ferrous metals asset fund management company, said, “The overall picture is that new investment funds have increased their exposure to copper for a number of reasons. Although this is a global trend, a significant portion of this investment has gone to the New York Mercantile Exchange.”

Although copper prices have been rising for several months, only the New York Mercantile Exchange and the most active July futures contract rose this week. As of Wednesday, although LME's global benchmark contract was basically flat, the price of the Comex July contract had soared by as much as 10%, to a record high for the contract.

According to many traders and brokers, this is what many traders and brokers call a typical short squeeze. As prices rose, market participants betting that the Comex contract would return to the same price as LME and the Shanghai Stock Exchange, another global benchmark, were forced to buy back these positions, creating a vicious cycle.

Colin Hamilton, managing director of commodity research at BMO Capital Markets, said, “The spread between the New York Mercantile Exchange and the London Mercantile Exchange of more than $1,000 per ton is unprecedented.” “The expiration of contracts has squeezed short positions and intensified this trend,” he explained.

Hedge funds and other traders operate on areas such as being bullish on the New York Mercantile Exchange, betting on narrowing the spread between New York, London, and Shanghai futures contracts, or the narrowing of the spread between New York futures contracts on different dates, etc., and usually use higher leverage ratios. Due to relatively low prices on the Shanghai Futures Exchange, some Chinese spot market participants are also selling stocks on the London Metal Exchange and the New York Mercantile Exchange and are planning to export.

The Comex July copper contract soared to a record high of $5.128 per pound ($11,305 per ton) in early Wednesday trading. The contract's premium also set a record higher than the Comex September contract. This situation is known as the spot premium in the commodities market and is a sign of a tight bear market.

Traders and brokers said that the surge in copper prices was driven by bears' compensation rather than any overall physical shortage, but highlighted the relatively tight supply situation in the US copper market.

Currently, the total inventory tracked by the New York Mercantile Exchange is 21,066 short tons, while the US LME inventory is only 9,250 tons. By contrast, America's annual copper demand is close to 2 million tons. Traders said that steady demand, compounded by shipping problems in Panama and the Suez Canal, has tightened the market. According to data from consulting firm CRU Group, US copper imports have fallen 15% so far this year.

The Chicago Mercantile Exchange said in a statement: “We are continuously monitoring our market and the market is operating as designed while market participants manage copper risk and uncertainty.”

In the commodities market, short squeezing is nothing new; it often drives the market frantically searching for raw material supplies to support paper contracts.

In 2020, as much of the world was paralyzed by the pandemic, gold traders competed to ship gold to deal with a similar imbalance between New York and London gold prices. In 1988, aluminum was squeezed by bears, causing some traders to load aluminum into large jets (an extremely unusual and expensive way to transport industrial raw materials) to the London Metal Exchange as soon as possible.

The current tight copper supply on the New York Mercantile Exchange has also triggered a similar move to ship copper to the US. According to people familiar with the matter, over the past 24 hours, Chinese traders have been calling shipping companies everywhere to try their best to ensure that the goods are transferred to the US.

South American traders and miners are also racing to increase shipments to the US. Chilean copper giant Codelco is putting all of its available production on the market and is negotiating with customers to delay part of the sale in order to maximize deliveries, people familiar with the matter said. Codelco did not immediately respond to requests for comment.

There are some signs that supply constraints are easing. The July copper contract declined slightly in early Thursday trading after falling back from Wednesday's high, while the premium for LME spot copper narrowed to $573 per ton, although it is still at an all-time high.

Further easing may occur in the future, as investors holding bullish positions through the commodity index will begin switching to copper in early June, which provides traders with short positions an opportunity to delay delivery and may ease spot premiums.

However, it is currently unclear whether this will be enough to ease the situation before the July contract expires. The contract will be delivered in early July. Gong Ming, an analyst at Jinrui Futures Co., Ltd., said that Chinese traders seeking to ship metals to the US discovered that the shipping schedule was fully booked, and the earliest shipping period from Shanghai to New Orleans was in early July.

To make matters worse, many copper inventories outside the US cannot be traded with New York Mercantile Exchange futures. For example, out of LME's 94,700 tons of copper at the end of April, more than 80% was produced in Russia, China, Bulgaria, or India, and copper from these countries cannot be delivered on the New York Mercantile Exchange.

Although China has accumulated a large amount of inventory in recent months, traders estimate that only about 15,000 to 20,000 tons can be delivered through New York Mercantile Exchange futures.

Anant Jatia (Anant Jatia), chief investment officer at Greenland Investment Management, a hedge fund that specializes in commodity arbitrage trading, said, “We believe that by the time it expires in July, physical arbitrage activity will not be enough to close positions in nearly a month. There wasn't enough material, and there wasn't enough time,”

“However, spot traders are currently highly motivated to ship copper to the US, and the arbitrage market will stabilize over time.”