SUPERNEWS

Macro

Copper Contango Hits Record, Undermining Bulls' Rally

Copper prices hit two-year highs over $10,000 a ton amid supply crunch and demand recovery, despite contango challenges.

By Barry Stearns

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5/10, 10:05 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
BHP Group Limited
Goldman Sachs Group, Inc.
Sociedad Quimica y Minera S.A.
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Key Takeaway

  • Copper's rally faces challenges as spot contracts trade at record discounts to futures, indicating oversupply and slack demand, especially in China.
  • The historic contango of $152.50 a ton signals financial strain for long-term copper bulls due to the cost of rolling contracts forward.
  • Despite bullish bets on a mine-supply squeeze, the massive contango highlights that smelters have yet to cut output significantly.

Copper's Contango Conundrum

Copper prices have soared to two-year highs, surpassing $10,000 a ton, driven by a combination of a mine-supply crunch and a tentative recovery in global demand. However, a historic widening of price spreads on the London Metal Exchange (LME) presents a challenge. The benchmark three-month futures have surged 18% on the LME this year, but spot contracts are trading at ever-greater discounts to futures, indicating a bearish signal of oversupply. This condition, known as a contango, reached a record $152.50 a ton on a cash-to-three-month basis, the widest spread in LME data since 1994. This scenario suggests slack spot demand, especially in China, where smelters are considering exporting excess stock due to domestic sales struggles.

Investment and Market Dynamics

Despite the contango, there are reasons for bullish investors to remain optimistic. The surge in copper prices is attributed to its crucial role in the transition towards carbon-neutral and net-zero goals, with increasing demand for copper in electric vehicles, data centers, and wind turbines. Investment opportunities are highlighted in companies like Sociedad Quimica y Minera de Chile SA (SQM) and BHP, with analysts maintaining a positive outlook despite recent dips in share prices. Copper futures are recommended for gaining exposure to potential price appreciation, with Goldman Sachs Group Inc. raising its year-end price target for copper to $12,000 a ton due to supply stress and anticipated metal deficits.

Global Implications and Strategic Agreements

The global demand for copper is underscored by strategic international agreements, such as the updated minerals-for-infrastructure deal between the Democratic Republic of Congo (DRC) and China. This agreement, which ties annual payments for infrastructure projects to copper prices remaining above $8,000 per ton, highlights copper's significance to the DRC's development strategy and China's investment in Africa's mineral sector. Such developments reflect the critical role copper plays in global industrial growth and international economic and development strategies.