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Copper is the new toilet paper, hoarding is one reason LME inventories at 47-year low

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(Kitco News) - A supply crunch and growing demand have pushed the copper market to the brink of a new breaking point as the London Metals Exchange adjusts its rules to deal with historically low inventory levels.

The current supply/demand imbalance has pushed copper prices back to near-record highs just below $10,000 a tonne on the LME exchange. Prices have moved back to the May highs as inventories in LME warehouses have fallen to 15,225 tonnes, their lowest level since 1974.

The low inventories have promoted the LME to take temporary precautions to maintain the market's liquidity.

"With immediate effect, the LME (acting through the Special Committee) has determined that it is appropriate in the circumstances to take the following three actions1 in respect of copper, which are intended to ensure market orderliness: (i) amending certain requirements within the lending rules; (ii) imposing a limit on the backwardation for tom-next contracts; (iii) introducing a deferred delivery mechanism for certain contracts," the LME said in a statement. "These changes are intended to be temporary and will be reviewed as appropriate by the Special Committee."

Although base metals are expected to see supply deficits this year, some analysts have noted that while unique market issues are also impacting supply levels, the world is not running out of copper.

Colin Hamilton, commodities analyst at BMO Capital Markets, noted that the supply issues that caused the LME to initiate the temporary measures have revealed flaws in the system; however, he added that the world is well supplied with copper.

"LME copper warehouse inventory isn't actually that low — indeed it was lower last time copper traded above $10,000/ t. But with canceled warrants representing over 90% of this (signifying a desire to remove this material from the warehouse), only 14kt of on-exchange copper was available to the market. And the fact that this occurred into the LME'sLME's prompt-date expiry does point to a classic short squeeze," he said.

Hamilton added that a lot of companies are hoarding the metal as they anticipate further supply issues in the future. He likened the current sentiment in the marketplace to what happened with toilet paper at the start of the pandemic as consumers emptied shelves of toilet paper around the world.

"It is natural psychology that, when there is concern that something critical to day-to-day operations may be in short supply in the not too distant future, purchasers rush out to buy it. And given the combination of ongoing logistics constraints and power issues, end-users of metals are feeling that pressure now. Feedback from LME Week was that end-users are currently sitting with more material on their balance sheets than usual to buffer against shocks, contributing to the near-term stock draw," he said.

Commodity analysts at TD Securities said that they expect the measure taken by the LME should alleviate the pressure of the current short-squeeze.

"Extreme levels of backwardation should ultimately incentivize metal to make its way into the exchange, further satisfying the near-term squeeze, but this acute supply shortage highlights that the market's ability to withstand such shocks is extremely low," the analysts said.

Not all analysts are optimistic that copper can hold on to its record highs. Bernard Dahdah, commodity analyst at Natixis, said that base metals could face a near-term correction demand starts to normalize in the first quarter of 2022.

"Much of the base metals rally through 2021 can be attributed to a 'bumper year of demand' as consumption deferred in 2020 was pushed into 2021. We would expect that in 2022 we return to more normal levels of demand which will attenuate the supply pressures," he said in a report.

Dahdah added that softening economic activity worldwide, particularly as China deals with a weakening housing market, could weigh global base-metal demand.

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