LME Copper Market Faces 80% Inventory Decline, Spot Price Surges

The London Metal Exchange (LME) copper market is currently facing one of its most significant historical squeezes, with inventory levels rapidly depleting. On Monday, the spot price of copper exceeded the price of the three-month futures contract by 280 dollars per ton, marking the largest price differential since 2021. This significant gap highlights the severe shortage of available copper in the market. Throughout the year, the available inventory on the LME has decreased by approximately 80%, exacerbating the supply constraints and driving up the spot price.

This situation is reminiscent of events from four years ago when the LME copper market faced a similar crisis. During that period, the market experienced a significant squeeze, leading to a sharp decline in inventory levels and a substantial increase in copper prices. The recurring nature of this event underscores the persistent challenges in the copper supply chain, which have been exacerbated by various factors, including geopolitical tensions and disruptions in mining operations.

The rapid depletion of copper inventory on the LME has raised concerns about the potential impact on global copper supply. The significant reduction in available inventory could lead to further price increases and supply chain disruptions, affecting industries that rely heavily on copper, such as construction, electronics, and automotive manufacturing. The current situation highlights the need for increased investment in copper mining and processing facilities to ensure a stable supply of this critical metal.

LME warehouses hold copper inventory that serves as a buffer for manufacturers during periods of high demand. Investors holding short positions also utilize these inventories for delivery. A significant spot premium typically indicates that the exchange's warehouse inventory is insufficient to meet demand. Historically, when the available quantity of a futures contract for delivery is far less than market demand, it can lead to a squeeze.

Data indicates that LME's available inventory has decreased by approximately 80% this year, currently equivalent to just one day's global usage. Over the past few months, global traders have rushed to transport copper to the United States ahead of potential import tariffs, further depleting LME inventory and causing copper shortages in other regions. Despite a recent slowdown in copper demand, some Chinese smelters have started exporting excess copper to international markets. However, China's inventory has also been divided due to metal flows to the United States, as COMEX copper prices remain higher than LME prices.

To address market distortions, LME has recently implemented new rules to prevent individual traders from artificially creating spot premiums by holding large near-month contract positions. These measures have been applied to the aluminum market and once forced Trafigura Group to return large holdings at a capped price difference to prevent the market from entering a spot premium state.

However, LME trading data indicates a deeper squeeze risk in the copper market. Monday's significant short-term price differential changes suggest that prices were not influenced by any single large trader. If any single trader were constrained by the rule on Monday, the next-day price differential would be limited to 49.725 dollars per ton. However, this differential surged to 69 dollars per ton at one point, indicating that the relevant restrictions were ineffective. Broader buying activity has laid the foundation for a larger spot premium. The surge in the next-day price differential also reflects the rapidly increasing cost of deferring delivery obligations by one day.

It is noteworthy that supply pressure is not limited to near-term contracts. The spot premium phenomenon in LME copper has now extended to the June 2026 contract, contrasting sharply with the market structure of half a year ago, when near-month contracts were at a discount. This structural change reflects ongoing market concerns about medium- to long-term copper supply, especially as global energy transitions drive demand growth.

This scenario has raised concerns among industry professionals that the copper market squeeze of four years ago may recur. In October 2021, a large commodity trading company withdrew a significant amount of copper from LME warehouses, causing LME copper inventory to plummet from over 150,000 tons a month earlier to just 14,150 tons by October 15, the lowest level since 1998. This sharp inventory decline directly drove up copper prices, with LME copper prices surging by approximately 14% in just half a month from early October that year.