A recent article by Bloomberg has flagged a problem with the copper market. It comes from a storage facility in Shanghai’s free trade zone where the Yangtze River meets the Pacific. These warehouses contained copper stockpiles and boomed on a financing scheme that allowed finance to be raised against physical copper. The problem is that these warehouses are now nearly empty. According to Bloomberg, stock levels are down around 300K tonnes from earlier this year to some of the lowest levels in decades.

Traders are paying premiums for copper delivery

The near-term outlook for copper is tilted to the downside of slowing global growth, but the physical market is very tight. The drop in supply levels from the bonded warehouses has already meant that copper on the Shanghai Futures for delivery this month is trading at a premium of 2,020 yuan for delivery in 3 months. This is the highest premium since 2005.

What this means is that if there is any sign of demand picking up then copper prices cab accelerate very quickly. David Lilley, chief executive of hedge fund Drakewood Capital Management Ltd, explains that with the warehouses being so low in inventory it is like the copper market living ‘without a safety net’. Mr. Lilley said that the ‘physical market is so tight, it’s like a room full of gunpowder- any spark and the whole thing could blow’.

Does this now play into the wider picture of potential higher copper prices in the medium term? Do medium-term copper buys make sense? See the previous article here for copper.