LME copper squeeze exposes supply strain as U.S. arbitrage pulls metal from London

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LME copper supply squeeze

Highlights

LME copper cash-to-three-month backwardation surged to $545 per ton and cash price hit a record $14,912 per ton amid August positioning squeeze.
LME inventories fell to a six-month low of 207,825 tons, with live stocks at just 103,075 tons and 38,150 tons newly delivered in three days.
CME three-month copper contract premium remains $430 per ton over LME due to ongoing arbitrage and tariff uncertainty, risking further London stock depletion.

August positioning clash drives LME dislocation

As reported by Reuters, this week's turbulence in the London copper market stems from a collision of large positions around Wednesday's key August prompt date, with available exchange stocks proving too small to absorb the pressure.

The premium for cash copper over three-month delivery widened to $545 per metric ton on Monday, the largest backwardation since 2021, while the cash price reached a record $14,912 per ton. The LME's "tom-next" spread, which measures the cost of rolling a position forward by one day, jumped to $110 per ton on Tuesday morning.

LME daily positioning data show three entities holding large long positions ahead of the squeeze. One held cash positions equal to 30-40% of warranted stocks, while two others were in the 50-80% range, leaving combined exposure well above the copper readily available in the exchange warehouse system.

LME inventories ended last week at a six-month low of 207,825 tons, and almost half of that total was tied up in cancelled warrants. That left live stocks at just 103,075 tons, intensifying pressure on short holders that needed to find metal for delivery.

U.S. premium keeps global copper competition elevated

A rush of fresh metal into LME warehouses is starting to relieve the immediate squeeze. A total of 38,150 tons of copper has been delivered over the last three days, including 5,000 tons in Hong Kong and 17,300 tons in Baltimore and New Orleans in the U.S.

The Hong Kong delivery suggests London's backwardation is strong enough to draw metal out of China, extending competition between LME traders and Chinese buyers. The U.S. inflows also highlight how much exchange copper is already concentrated there, with CME warehouses accounting for 58% of global exchange inventory at the end of July.

LME stocks are also skewed toward U.S. locations. At the end of last month, U.S. warehouses held 37% of the London market's registered inventory and 79% of its off-warrant inventory, and some of that metal has likely been used to cover August short positions.

The new warranting activity is easing time spreads, with the cash-to-three-month backwardation narrowing to $176 per ton and "tom-next" falling to $71 per ton. Even so, the market remains under strain because the price incentive to move copper to the U.S. persists while President Donald Trump has yet to clarify whether refined copper imports will face tariffs.

That uncertainty is keeping the CME contract at a premium to the LME price. The CME premium for three-month delivery stands at $430 per ton, while the premium for 10-month delivery is above $1,000 per ton, preserving a profitable arbitrage that could keep draining metal from London and raise the risk of further disruptions.

Our earlier article on rising long-term U.S. Treasury yields explained how the selloff in longer-dated government debt was tightening financial conditions even with the Fed holding rates steady. We noted that higher yields were feeding through to mortgages and other consumer borrowing, while expectations around upcoming policy signals and trade developments were shaping investor risk appetite.

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