The copper market is historically squeezed by short sellers! Are the short sellers Tok and Luomu's IXM?

Victims of the historic short squeeze case in New York copper futures are emerging.

On May 15th, media reports cited sources saying that commodity trading giant Trafigura and IXM, a subsidiary of China's Luoyang Molybdenum, are attempting to purchase physical copper to settle their large short positions held on the U.S. CME exchange.

Trafigura and IXM hold significant short positions in the COMEX (a subsidiary of the CME Group) copper market, which means they were betting on a decline in copper prices or hedging their own price risk exposure. However, the sudden surge in COMEX copper prices starting from Tuesday caught them off guard, resulting in these short positions being severely squeezed.

By Wednesday, COMEX copper prices hit a historic high of $5.1775 per pound (equivalent to $11,414 per ton), rising by 14% in the past week and surging by 28% since the beginning of the year. At the time of writing, COMEX copper prices had fallen to $4.94 per pound.

Trafigura admits diverting copper shipments to the U.S., Luoyang Molybdenum says risks are completely controllable

In response to media reports, Trafigura admitted to shipping more physical copper to the United States.

Trafigura is one of the largest physical copper suppliers in North America. Given the premium in this market, we are delivering more copper to COMEX.

It is reported that Trafigura has requested some copper producers to divert shipments for May and June to the United States, but temporary changes in destination are very difficult.

It is worth noting that Trafigura was previously bullish on copper prices. Jeremy Weir, the group's CEO, stated at the CRU World Copper Conference last month that in order to fill a potential supply gap of 8 million tons by 2034, mining companies would need prices above $10,000 per ton, possibly even reaching $12,000.

Luoyang Molybdenum issued a statement on Thursday, stating that IXM's hedging trading strategy is different from pure speculation and the risks are completely controllable. IXM is one of the world's largest physical non-ferrous metal traders.

It is common industry practice for international trading companies to engage in hedging transactions where they buy in one market and sell the same quantity in another market. Currently, the U.S. COMEX market has a high premium on copper products, and conducting physical transactions in this market is advantageous for global commodity trading companies. This hedging trading strategy by IXM, also known as Trafigura, is different from pure speculation and the risks are completely controllable.

CME responded by stating that they will continue to monitor the market, but believe that as market participants, Trafigura and IXM have performed well in managing copper risks and uncertainties.

Sources say that COMEX copper prices are expected to continue rising until copper ore from South America and Australia reaches the U.S. market, which may take several weeks

What's Happening in the Derivatives Market?

The reason for the short squeeze in New York copper is the tightening supply and demand of copper. On one hand, disruptions on the supply side have raised concerns about a copper shortage; on the other hand, the global manufacturing recovery and energy transition have boosted demand for copper. Additionally, the construction and development costs of major mines are increasing.

The existing copper production is expected to sharply decline in the coming years. Institutions estimate that mining companies will need to invest over $150 billion between 2025 and 2032 to expand copper mining capital expenditures to meet industry supply needs.

However, CRU analyst Robert Edwards believes that fundamentals alone cannot explain such extreme prices.

While the fundamentals of the U.S. copper supply and demand may not provide strong support, they may not prove that this extreme situation is reasonable, indicating that something else may be happening in the derivatives market.

Meanwhile, the price of COMEX copper has risen more than the London Metal Exchange (LME), creating arbitrage opportunities for producers and traders to exploit price differences between the two locations.

Citigroup pointed out in a report that arbitrage-related activities and pure short covering have driven the rise in COMEX prices, which may be difficult to sustain. The redirection of physical copper will alleviate the imbalance of arbitrage but will take time.

The price of copper on the LME is around $10,240 per ton. Considering costs such as freight and insurance, traders can earn about $300 per ton by obtaining copper from the LME system and delivering it to the CME. However, the issue lies in the fact that half of the available copper in LME registered warehouses comes from Russia and cannot be delivered to the CME system