Copper Prices Slide from Record Highs, Options Skew Remains Bullish

Key Takeaway

• Copper prices hit a record high of $11,000 per ton, driven by global shortage concerns and energy transition demands.
• Chinese fabricators are cutting production to 66% capacity due to high prices and slowing sales, impacting the supply chain.
• China's strategic stockpiling of copper aims to boost green tech capacity, potentially flooding European markets with subsidized products.

Copper Prices Hit Record Highs

Copper prices have surged to an all-time high, surpassing $11,000 per ton on the London Metal Exchange this week. This dramatic rise is driven by deepening concerns over a global shortage of the metal, which is crucial for the energy transition. However, the rapid ascent is causing significant disruptions in China's domestic supply chain. From smelters refining copper ore to producers of goods like solar panels and home electronics, the entire chain is feeling the strain. Henan Yuxing Copper Co., a smaller firm in central China that manufactures copper pipes for air-conditioners, reported a 20% to 30% drop in sales orders in May, traditionally a peak season. "Our sales orders have fallen about 20% to 30% in May, the traditional peak season, from the previous month — something we have never seen in so many years," said Hai Jianxun, a sales executive at the company.

Impact on Chinese Fabricators

Chinese fabricators, who produce over 30 million tons of copper products annually, are struggling to cope with the high prices. According to Shanghai Metals Market, firms are expected to cut run rates to 66% of capacity this month, down from 68% in April. This is the lowest for the season since at least 2017. A survey by Mysteel Global, covering 28 copper rod plants, found that more than 60% of producers had cut or halted production due to slowing sales. "Some fabricators have even asked to delay term supplies of refined copper after their warehouse product inventories ballooned," said Wang Yingying, an analyst with Galaxy Futures Co. Smaller firms are facing liquidity issues after betting that copper prices would fall. Despite these challenges, some industry players remain hopeful that demand could return if prices drop. "Orders might rebound in June or July if copper can fall below 80,000 yuan a ton," said Henan Yuxing’s Hai.

Strategic Stockpiling and Market Dynamics

China's strategic stockpiling of copper is another significant factor driving the market. Macroeconomist Andreas Steno Larsen noted that China's copper inventories are at an all-time high for this time of year. "Something is cooking in China," Larsen remarked on social media platform X. He suggested that China is gearing up its green tech capacity, predicting that European markets will be inundated with subsidized Chinese solar panels, EVs, and wind turbines through 2024 and 2025. This strategic move has allowed China to secure a strong supply chain, challenging European companies’ competitiveness. Bank of America analysts highlighted that "renewables, EVs, and other new uses of copper – such as data centers and AI – combined with supply-side issues are driving tight markets." They also noted that decarbonization efforts lead to higher metal usage, often replacing hydrocarbons with electrification, which translates to more copper usage.

Street Views

• Jeff Currie, Carlyle Group (Bullish on Copper):

  "The mismatch between rapidly-growing demand and sluggish supply means the metal has more room to run... turbocharged demand from environmental projects and defense."