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10/20/2021 | News release | Distributed by Public on 10/20/2021 06:24

LME copper spreads backwardated amid stock squeeze

Significant drawdowns of copper stocks in the London Metal Exchange (LME) warehouse system has contributed to volatile movement in LME copper prices and subsequently the widening of copper spreads.

Nearby spreads have been rapidly widening since the start of October as a result of falling inventories and tightening supply prospects with the cash-to-three-month copper spread on the LME climbing to a backwardation of $1,053.50/t on 18 October.

Cash-to-three-month-spreads have narrowed since, moving to a backwardation of $338/t on yesterday's close and a backwardation of $251.75/t today, but remain very wide in comparison with spreads earlier in the month, which were trading in a backwardation range of of $6-10/t between 28 September and 5 October.

Copper inventories in the LME warehouse system have sharply fallen in October to lows not seen since 1974 following a slow drawdown in stocks across previous months.

On-warrant copper stocks fell by 87.6pc to a fresh low of 14,150t on 15 October. Warehouse stocks have moved very little since, with on-warrant stocks at 17,875t today.

The swift decline in inventories contributed to significant upward movement in LME copper prices since the start of October. The three-month copper contract climbed to a recent high of $10,727.50/t in the official morning session on 18 October, up by 17.9pc from the start of October.

Falling copper stocks and widening spreads have come amid continued firm demand and ongoing issues in the global supply chain, which have exacerbated supply fundamentals.

Following the significant swings in the copper spreads, the LME responded yesterday evening by imposing new rules and regulations on the market, including the amendment of certain requirements within the lending rules, a limit on the backwardation in the shortest-term spread, and a deferred delivery mechanism for certain contracts.

The exchange said actions are "intended to ensure market orderliness" and are supposed to be temporary.

By Corey Aunger