Trafigura, IXM caught in COMEX copper short squeeze as prices hit record
Revisiting Cobre Panama Shut Down in Panama.
LONDON/BEIJING, May 15 (PIXY)—Commodity traders Trafigura and IXM are looking to buy physical copper to hedge against large short positions on the U.S. exchange CME, where copper prices soared to record highs on Wednesday, five sources with direct knowledge of the matter said.
Short positions can be bets on lower prices or producers hedging their output. A short squeeze occurs when parties holding such positions are forced to buy them back at a loss or deliver physical copper to close them out.
Copper prices on COMEX, part of the CME hit a record peak of $5.1775 a lb or $11,414 a metric ton on Wednesday, a gain of 28% so far this year and 14% over the last week.
They were down 0.3% at $4.9375 at 1644 GMT.
"Trafigura is one of the largest physical suppliers of copper to North America and given the premium in this market we are shipping larger quantities of the metal to COMEX," the Swiss-based trader said
Geneva-based IXM, owned by China's CMOC Group did comment.
"We continuously monitor our markets, which are operating as designed as market participants manage copper risk and uncertainty," the CME said in response to a request for comment.
COMEX copper prices are expected to keep climbing until shipments of the metal used in the power and construction industries from South America and Australia arrive in the United States.
It could be many weeks before short positions can be cut, the sources said.
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"Copper supply, demand fundamentals in the U.S., while not unsupportive, probably don't justify such extremes, suggesting something else is happening in the paper market," said CRU analyst Robert Edwards.
Swiss-based commodity trader IXM is one of the world's largest traders of physical non-ferrous metals.
The sources said Trafigura has asked some copper producers to divert May and June shipments to the United States. However, changing destinations at short notice is extremely difficult.
The COMEX copper rally has outpaced gains on the London Metal Exchange (LME) and created an arbitrage opportunity when copper producers and traders sell commodities in different locations to take advantage of price differentials.
"We think arb-related and outright short covering has fuelled COMEX gains which are likely unsustainable: redirection of physical units to the US should ease the arb dislocation, but this will take some time," Citi analysts said in a note.
Copper prices on the LME are trading around $10,240 a ton.
One source said that taking into account costs such as freight and insurance, traders can make around $300 a ton by taking copper from the LME system and delivering it to the CME.
However, the problem is that half of the copper available in LME-registered warehouses is of Russian origin and cannot be delivered into the CME system.
Several Chinese copper importers had redirected shipments to the United States, according to two sources.
However, copper cathode from China, which smelts about half of the World's copper, cannot be delivered against COMEX contracts.
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A short squeeze in the copper futures market on the COMEX (Commodity Exchange) division of the New York Mercantile Exchange has sent prices soaring to record highs. Traders who had taken large short positions, betting on copper prices to fall, were caught off guard by a sudden surge in demand, forcing them to buy contracts to cover their short positions.[1]
This created a buying frenzy that exacerbated the upward price movement. Major trading houses like Trafigura and IXM were among those caught in the short squeeze, suffering significant losses as copper prices skyrocketed.[1]
What is a Short Squeeze?
A short squeeze occurs when the price of an asset, in this case copper futures, rises rapidly against traders who had taken large short positions. Short sellers borrow the asset and sell it, hoping to buy it back later at a lower price to profit from the price decline. However, if prices unexpectedly rise, short sellers are forced to buy the asset at higher prices to cover their short positions, driving prices even higher in a self-reinforcing cycle.
Impact on Copper Market
The copper short squeeze highlights the risks of excessive short selling and the potential for market dislocations. As prices surged, physical buyers rushed to secure supplies, further fueling the rally. The event underscores the importance of risk management and the need for traders to carefully manage their exposure to potential short squeezes, which can lead to substantial losses.[1]
Implications for Finance
Short squeezes are not limited to commodity markets and can occur in various financial instruments, including stocks, bonds, and currencies. They serve as a reminder of the risks associated with leveraged trading strategies and the importance of proper risk management practices in the finance industry. Regulators and market participants will likely scrutinize the events surrounding the copper short squeeze to identify potential vulnerabilities and prevent similar occurrences in the future.
Cobre Panama Copper Mine Shut Down
The Cobre Panama copper mine, owned by Canadian mining company First Quantum Minerals, has been ordered to shut down by the Panamanian government after widespread protests over environmental concerns and a Supreme Court ruling deeming the mining concession unconstitutional. [1][2] The mine's closure, which could cost around $800 million, will result in the loss of thousands of direct jobs and impact tens of thousands of indirect jobs, dealing a significant blow to Panama's economy as the mine contributed around 5% to the country's GDP. [3][5] While First Quantum argues that the mine had a net-zero environmental impact and adhered to regulations, environmental activists celebrated the ruling as a victory for protecting biodiversity and water resources in the region. [2][4] The closure of one of the world's largest new copper mines is expected to have a noticeable impact on the global copper market, potentially exacerbating supply concerns amid rising demand for the metal in the energy transition. [2][4]
Is Cobre Panama Mine still shut down today?
Yes, the Cobre Panama copper mine remains shut down as of today. The Panamanian government ordered the closure of the mine in November 2023 after the Supreme Court ruled that the mining concession granted to the Canadian company First Quantum Minerals was unconstitutional. [1]
In December 2023, Panama's Ministry of Commerce and Industries announced it was pursuing a "closure plan" for the mine, which involves conducting environmental, technical, and legal audits, as well as forming a multidisciplinary expert panel. The ministry stated that it expects to present the closure plan in June 2024. [5]
However, First Quantum has not been provided with a legal basis for the closure plan and has been unable to engage formally with the government to clarify the situation. The company has expressed concerns about the environmental consequences that may occur if critical supplies and personnel continue to be denied access to the mine site due to ongoing blockades. [5]
As of January 2024, the Panamanian government has begun inspecting the mine site as part of the closure process, with a small staff remaining to maintain the property. [4] First Quantum has stated that it will pursue all appropriate legal avenues to protect its investment and rights in the mine. [5]
So in summary, the Cobre Panama mine remains shut down today as ordered by the Panamanian government, with the closure process ongoing amid legal disputes between the government and First Quantum over the mining concession's constitutionality. [1][4][5]
Citations:
[1] https://www.bbc.com/news/world-latin-america-67565315
[2] https://www.mining.com/panama-orders-first-quantums-copper-mine-closure/
[3] https://en.wikipedia.org/wiki/Cobre_mine,_Panama
[4] https://apnews.com/article/panama-mine-first-quantum-copper-baccfe37368f483b4346a0d97d3be71b
[5] https://www.first-quantum.com/English/announcements/announcements-details/2023/First-Quantum-Provides-Update-on-the-Cobre-Panama-Mine-Regarding-Responsible-Environmental-Stewardship/default.aspx
Citations:
[1] https://apnews.com/article/panama-mine-first-quantum-copper-baccfe37368f483b4346a0d97d3be71b
[2] https://www.bbc.com/news/world-latin-america-67565315
[3] https://www.mining.com/web/closure-of-first-quantums-panama-mine-seen-around-800m-minister-says/
[4] https://financialpost.com/commodities/mining/panama-government-cannot-ignore-mining-first-quantum-ceo
[5] https://www.reuters.com/markets/commodities/closure-first-quantums-panama-mine-seen-around-800-mln-minister-says-2024-03-06/
Citations:
[1] https://www.reuters.com/markets/commodities/trafigura-ixm-caught-comex-copper-short-squeeze-prices-hit-record-2024-05-15/
[2] https://www.reuters.com/business/finance/us-lawmakers-blast-former-silicon-valley-bank-ceo-greed-mismanagement-2023-05-16/
[3] https://coinappraiser.com/rare-coin-knowledge-center/coins-com-glossary-terms/
[4] https://www.glencore.com/dam/jcr:4d8d4b9c-9c26-465b-8ebd-3d9ae1b1775b/A44511504%20v6.0%20Glencore%20EMTN%202021_Base%20Prospectus.pdf
[5] https://www.focus-economics.com/blog/top-economics-influencers-to-follow/
[6] http://online.wsj.com/article/SB10000872396390444082904577609542956743200.html