Copper's Price Dip: A Supply-Demand Imbalance in Focus

The recent dip in copper prices is a clear signal that the market's balance has shifted. After a powerful rally that saw the metal hit a record high of $13,387 per tonne on January 6, prices have pulled back sharply. As of this morning, the benchmark three-month forward price on the London Metals Exchange (LME) stood at $11,795, down from that peak. This week, the metal fell 0.8% to $12,953.50 a ton, following a 3.2% slump last week. The move is part of a broader weakness in industrial metals, mirroring a plunge in silver.

This price action reflects a reversal of the tight supply conditions that fueled the rally. The primary driver now is a build-up of inventories and softer near-term demand, particularly from China. While the LME's stockpile in Asia jumped, traders are diverting supplies away from the US, where price premiums have eased. This follows a period of massive stockpiling in the US ahead of anticipated import tariffs, a dynamic that had previously supported the LME price. Now, with that artificial scarcity fading, the focus returns to fundamental demand.

The evidence points to a specific imbalance. On one side, there are signs of resilient demand from China's power grid sector, with State Grid announcing a 35% jump in fixed-asset investment for January. Yet, on the other side, spot market appetite is waning. Daily refined copper trading volumes in China fell to 25,300 tons on Wednesday, down from a three-month high earlier in the week. This softness, combined with rising inventories, is pressuring prices. For now, the temporary oversupply in warehouses and the cooling in Chinese spot buying are outweighing the longer-term demand thesis and underlying supply constraints.

Inventory Shifts: The Physical Disconnect

The recent price dip is not a sign of global copper tightness, but of a profound physical disconnect. The market is showing two conflicting stories: massive stockpiles in the US and rising inventories in Asia, while the LME's core warehouse system remains lean. This split is the direct result of a specific mechanism driven by policy threats.

The catalyst was a historic tariff threat. In early February 2025, US president Donald Trump's tariff threats created a record incentive to move copper into the US. The premium on Chicago Mercantile Exchange (CME) contracts over the LME hit $1.30/lb, a staggering gap that prompted a massive relocation of copper cathodes. This artificial scarcity in the US, driven by fear of future tariffs, is now the source of today's inventory imbalance.

The mechanics are clear. As the immediate tariff threat receded and the premium eased, the incentive to ship copper to the US vanished. Traders began diverting supplies that were bound for the US into LME warehouses in Asia instead. This explains the jump in LME stockpiles in Asia and the cooling in Chinese spot buying. The metal is physically moving away from the US market, where it had been stockpiled, and into other global hubs.

The resulting physical disconnect is stark. On one side, CME warehouse totals have surged to over 453,000 tons, a record high. On the other, LME stocks remain below 100,000 tons. This creates a two-tiered market. The US has a glut of copper, while the rest of the world's primary clearinghouse is nearly empty. This is not a sign of global oversupply, but of a supply chain in flux. The record US inventory is a legacy of a policy-driven panic that is now unwinding, while the LME's low levels reflect the ongoing physical demand from Asia and Europe that has not yet been met by this diverted flow.

The bottom line is that this inventory shift is a temporary, artificial condition. It does not change the underlying supply-demand fundamentals for the metal itself. It simply shows where the physical metal is sitting right now, a direct consequence of a tariff threat that has faded. For the price to stabilize, the market needs to see this physical disconnect resolve, with copper flowing back toward the global demand centers that are still hungry.

Demand Drivers: China's Pullback vs. Forward Deficit

The current price weakness is a clash between a softening near-term demand and a powerful, forward-looking supply deficit. The immediate pressure comes from a specific pullback in China's consumption, while the longer-term outlook is shaped by a looming global shortfall.

Goldman Sachs notes that the recent weakness in China's refined copper demand is more acute than it was during the 2024 rally. This is a critical shift. In past cycles, Chinese smelters often responded to high prices by cutting production and exporting more refined metal, which would have eased global tightness. This time, the fundamental setup looks different. J.P. Morgan points out that more acute supply disruptions are likely to persist for multiple quarters, which limits China's ability to simply wait out higher prices. The market is now watching for a reversal in Chinese refined production growth, as smelters may soon find themselves short of raw material. This suggests that China's pullback is a temporary reaction to current price levels, not a structural retreat.

Zooming out, the forward-looking picture is one of persistent scarcity. J.P. Morgan Global Research projects a global refined copper deficit of ~330 kmt in 2026. This deficit is driven by two main forces: acute supply disruptions and continued shipments to the US. The mudslide at Grasberg in Indonesia and downgraded output at Chile's Quebrada Blanca mine have significantly curtailed mine supply. At the same time, the arbitrage created by the threat of US tariffs has continued to draw marginal imports into the US, locking up inventory there. This combination of reduced supply and diverted flows ensures that the physical market will remain tight for the coming year.

The key near-term catalyst that will determine which side of this equation wins out is clarity on US tariffs. Goldman Sachs Research's base case is that a 15% tariff will be announced in mid-2026 and implemented in 2027. This timeline is crucial. It suggests that the current stockpiling incentive in the US will persist for several more months, keeping a floor under prices as inventories are drawn down elsewhere. However, any delay in that announcement or implementation could dramatically shift the balance, as the probability of a tariff reduces and focus turns back to the well-supplied global market. For now, the market is caught between a weak demand signal from China and a powerful forward deficit, with the tariff decision acting as the switch that will decide which story dominates.

Supply Constraints and Catalysts to Watch

The current price weakness is a pause, not a trend reversal, but the market needs clear signals to confirm which way the balance will tilt next. Several specific events and data points will determine whether the dip is a buying opportunity or the start of a sustained correction.

First, watch for China's annual breakdown on investment allocations later this month. The State Grid's strong start is encouraging, but the market needs to see how that capital is actually deployed. The annual report will show whether spending is flowing into copper-intensive sectors like property and manufacturing, or if it's concentrated in the power grid projects already announced. This data is the most direct gauge of real-world demand and will help resolve the tension between near-term softness and forward-looking deficits.

Second, monitor inventory levels weekly. The physical disconnect is the core story. A sustained build in LME stocks outside Asia would signal that the diverted flow is becoming permanent, easing global tightness. Conversely, a plateau or decline in US CME inventories would suggest the stockpiling incentive is holding, keeping a floor under prices. The market is currently in a state of flux, and weekly data will show whether the physical market is resolving toward balance or drifting further apart.

The primary risk to the bull case is a larger-than-expected global surplus. Goldman Sachs recently raised its forecast for a 2026 surplus to 300 kt from 160 kt. This is a critical warning. It means that even with supply disruptions, the combination of stockpiling and potential demand softness could outpace available supply. The tariff decision is the switch that will flip this forecast. If the mid-2026 announcement is delayed or the implementation pushed back, the probability of that larger surplus materializing rises sharply. In that scenario, the market would turn its focus from scarcity to a potential glut, putting renewed pressure on prices.

For now, the setup is one of conflicting signals. The market is waiting for China's investment data to confirm demand, for inventories to show a path to resolution, and for the tariff timeline to crystallize. The current dip reflects uncertainty, but the underlying deficit remains. The catalysts are in motion, and their outcomes will define the next phase.