(Bloomberg) -- Copper inventories available on the London Metal Exchange hit the lowest since 1974, in a dramatic escalation of a squeeze on global supplies that sent spreads spiking and helped drive prices back above $10,000 a ton. Copper tracked by LME warehouses that’s not already earmarked for withdrawal has plunged 89% this month after a surge in orders for metal from warehouses in Europe. Stockpiles have also been falling fast on rival bourses and in private storage, and LME spreads have entered historic levels of backwardation, with near-term contracts trading at record premiums.
The slumping global stockpiles and resilient demand for copper stand in stark contrast to mounting worries over the macroeconomic outlook, and the risk that stagflation and power shortages could derail the world’s strong growth trajectory.
Copper rose as much as 2.6% on the LME, to $10,244 a ton. The metal is on course for a weekly gain of 9%, which would be the biggest since 2016. After fresh orders to withdraw metal on Friday, there are now just 14,150 tons of copper freely available in LME warehouses, in an industry that consumes about 25 million tons annually.
“If more metal doesn’t make it into the exchange, then it really is in a difficult position,” Michael Widmer, head of metals research at Bank of America, said by phone. “Right now the LME is running a physical contract that effectively is not really backed by physical metal.”
Earlier Friday, LME copper contracts expiring in one business day’s time traded at a $175 premium to those maturing a day later. The so-called tom/next spread later contracted to just $5, but the earlier backwardation was the biggest in data going back to 1998, and compared with just $1 at the close on Monday.
The longer-term spread between spot and three-month contracts spiked to reach $350 a ton, which was also the most on record.
One reason that the tom/next spread rarely trades in such large backwardations is that the LME forces anyone with a dominant holding in inventories and spot contracts to lend them back out to buyers at pre-determined rates, based on the size of their positions.
While that’s placed a cap on the spread during previous short-term LME supply squeezes, the latest data from the bourse shows that no one company was subject to those lending rules as of Tuesday. Instead, three separate entities held positions equaling as much as 120% of on-warrant stocks -- and anyone who wanted to borrow or buy from those companies would have been competing freely against other bidders at a time when supply anxiety is rising fast.
The last time that type of dynamic developed was during a historic squeeze in 2006, when a buying spree early on in China’s industrial boom drained LME on-warrant inventories to a near-record low. LME inventories are now at even lower levels than was the case then, while Chinese inventories also dropped Friday. Shanghai Futures Exchange stockpiles declining to 41,668 tons, the lowest level since 2009.
While falling inventories across major exchanges point to a fundamental mismatch between supply and demand, some short-term relief could be seen if stockholders who have requested to withdraw metal in recent days instead decide to deliver it back to take advantage of sky-high spot prices.
There are currently 167,250 tons of copper scheduled for withdrawal from LME warehouses, but the steep backwardation creates an incentive for owners to immediately sell their holdings on the exchange and use the lower-priced futures contracts to buy the metal back at a later date.