Research by Zijin Tianfeng Futures Institute

Core conclusions: (1) Low inventories primarily increase the time value of copper, with spreads typically reacting faster than absolute prices. After November 2021, while total LME inventories continued to decline, deliverable warrants began to increase, and the nearby premium subsequently fell. The sustainability of a squeeze hinges on the volume of positions needing resolution before the delivery date and the amount of warrants the market can provide for settlement. (2) Low inventories underpin copper prices and amplify supply-demand shocks, but the medium-term direction of absolute prices remains governed by the macroeconomic landscape. During the later stages of the 2021 squeeze, the nearby premium stayed elevated, yet the LME 3-month copper price had already fallen about 10% from its October peak. Weakness in the property sector first manifested in leading indicators: China's housing starts fell 7.7% year-on-year from January to October, and land purchases declined by 11.0%. The manufacturing PMI dropped to 49.6 and 49.2 in September and October, remaining in contractionary territory for two consecutive months, with the new orders index falling to 48.8 in October. The US CPI rose to 6.2% year-on-year in October, the highest since November 1990; the Fed initiated tapering in November, reducing asset purchases by $15 billion monthly, and in December, it announced an increase in the reduction scale to $30 billion per month. Chinese data lowered future copper consumption expectations, while US policy tightening raised the dollar and funding costs. Ultimately, macroeconomic pressures outweighed the support from low inventories. (3) The market's perception of future supply determines whether the nearby tightness can transmit to the forward curve. In October 2021, the ICSG projected a 328,000-tonne surplus for 2022. The market believed that new copper mine capacity would gradually replenish inventories, preventing the nearby squeeze from evolving into a sustained multi-month price rally. Subsequent statistics showed an actual apparent deficit of 434,000 tonnes in 2022, yet copper prices still fell sharply from their March highs. The rapid Fed rate hikes, a strengthening dollar, and demand concerns from China's COVID-19 lockdowns and property downturn dominated the price direction that year, with supply expectation support often proving more reactive than actual supply support.

Overview of the 2021 Copper Market

2021 was a significant year for copper. The average annual price of the Shanghai copper front-month contract was 69,500 yuan per tonne, a substantial increase from 2020. The LME 3-month copper price climbed from around $7,800 at the start of the year to a historic high of $10,747 in May, then traded in a high range, before surging above $10,400 again in October. The annual price chart exhibited an "M-shaped" double-peak structure. Three primary macroeconomic forces drove this pattern: First, the synchronized global recovery and liquidity glut in the post-pandemic era. The Fed maintained a zero-interest rate policy and $120 billion in monthly asset purchases until November, when it initiated tapering. The dollar index traded in a weak range of 89-96 for the year. The global manufacturing PMI was in a high expansionary zone during the first half of 2021, with the JP Morgan Global Manufacturing PMI reaching 56.0 in May, and indicators for the US and Eurozone exceeding 60, sustaining high expectations for industrial commodity demand. Second, the explosion of the green transition narrative. 2021 was the year the "carbon neutrality" theme fully permeated the commodity market. The long-term incremental demand for copper from new energy vehicles, grid upgrades, and renewable energy installations was repeatedly highlighted, with Goldman Sachs calling copper "the new oil," providing immense imagination for future prices. Third, persistent supply-side disruptions. Recurring COVID-19 outbreaks in Chile and Peru affected copper mine output, frequent strike threats at mines like Escondida occurred, and copper concentrate treatment charges (TC) remained in a historically low range of $20-60 per tonne throughout the year, providing a floor for prices. From a full-year perspective, according to ICSG data, global copper consumption was 25.266 million tonnes in 2021, while global supply was 24.801 million tonnes, resulting in a deficit of 455,000 tonnes.

The October 2021 Squeeze: Declining Inventories and Surging Premiums

In the second half of 2021, copper prices consolidated above $9,000 for most of the summer after retreating from their May highs, with macro factors being the primary headwind. The Fed repeatedly hinted at tapering its bond purchases, casting a shadow of a stronger dollar. China's Evergrande debt crisis began to escalate in June, leading to repeated downward revisions in demand expectations for the property sector. Starting in September, "energy intensity controls" and power rationing affected 16 provinces, pushing down operating rates for downstream fabricators. The September PMI fell below the boom-bust line, and China's Q3 GDP growth slowed to only 4.9%. However, the overlooked factor was that inventories had already fallen to dangerous levels. The de-stocking in 2021 was broad-based, with LME inventories, Shanghai Futures Exchange (SHFE) inventories, and Chinese bonded warehouse stocks all declining simultaneously. The State Reserve Bureau (SRB) sold copper from state reserves in four batches starting in July, with the fourth batch completed on October 9, totaling 110,000 tonnes. SHFE copper inventories fell to 41,668 tonnes by mid-October, the lowest level since 2009. The domestic squeeze in China actually preceded the LME one. Before the National Day holiday, the main SHFE copper contract was trading around 69,000 yuan. After the holiday, it gapped higher, surging to 75,000 yuan by mid-October. On October 15, the spread between the CU2110 and CU2111 contracts soared to +1,270 yuan, the peak of this domestic squeeze. After the rolling of the continuous contract on October 18, the spread between the "front month" (CU2111) and the "next month" (CU2112) narrowed to +130 yuan, indicating a significant easing of the nearby tightness. The trigger on the LME side came from two directions. One was the European energy crisis, which pushed up electricity costs, forcing some smelters to cut production. The other, more direct trigger, was the large-scale withdrawal of copper from LME warehouses by Trafigura, the world's largest independent commodity trader. Data published by the LME showed that a single entity held between 50% and 80% of LME copper warrants, meaning control over deliverable stocks was highly concentrated. Requests to withdraw over 150,000 tonnes of copper from LME warehouses over the past two months had nearly exhausted available stocks, with Trafigura accounting for a significant portion. The first acceleration point occurred on October 8. Warrants plummeted from 75,875 tonnes, and the Cash-3M spread jumped from $9.50 to $26.75. From October 11 to 13, warrants evaporated at a rate of roughly 10,000 tonnes per day, and the Cash-3M spread simultaneously climbed from $61.75 to $108.50. On October 14, warrants plummeted to 14,150 tonnes, an 87% drop from October 1, marking the lowest level since 1974. The Cash-3M spread that day was $147. On October 15, the overnight T/N contract (the cost for shorts to roll their positions forward by one day) saw its backwardation surge to $175 per tonne, costing shorts $175 per tonne for each day they rolled. On October 18, following the LME's two-day settlement cycle for spot contracts, the cash settlement date for trades executed that day was October 20, which coincided with the monthly prompt date for the third Wednesday of October. The concentrated delivery pressure near the prompt date drove the Cash-3M spread to a record high of $1,103.50 per tonne. The main SHFE copper contract closed at 75,130 yuan per tonne, the highest closing price from October to December. The import arbitrage window worsened to -7,702.80 yuan per tonne by October 19.

How the Squeeze Ended: Rule Changes, Warrant Recovery, and Macro Repricing

From October 19 to mid-December, the nearby premium and the absolute price of copper began to decline along two distinct paths. The LME's adjustment of trading rules and the gradual recovery of deliverable warrants directly alleviated the delivery pressure on shorts. The reversal of the domestic thermal coal market, the Fed's initiation of tapering, and higher-than-expected US inflation in October suppressed copper prices through risk appetite, the dollar, and interest rate expectations. These two forces overlapped in the same period, ultimately causing the Cash-3M spread to fall from $1,103.50 to near zero, ending the October surge in copper prices. On October 19, institutional intervention on the external market and a policy shock on the domestic market occurred simultaneously, ending the pulse-like rise in copper prices. On that day, the LME set a maximum premium for the T/N spread at 0.5% of the previous day's cash settlement price. For holders controlling more than 80% of warrants, the maximum price for lending out warrants was further reduced to 0.25%. Shorts that could not borrow warrants at the regulated price were also allowed to apply for deferred delivery. The LME also requested recent trading data from members and initiated an investigation. These rules reduced the risk of shorts being forced to roll positions at high costs, and the Cash-3M spread fell from $1,103.50 on October 18 to $338 on October 19, a single-day narrowing of about 69%. On the same day, the National Development and Reform Commission (NDRC) announced it was studying measures to intervene in coal prices, and it visited the Zhengzhou Commodity Exchange to investigate and address speculative trading in thermal coal futures. That evening, all thermal coal contracts hit their daily limit down, triggering a total of 39 contract circuit breakers on China's futures markets, with commodities like coking coal, coke, methanol, and PVC also plummeting. The night session closing price of the SHFE copper front-month contract fell from 75,130 yuan on October 18 to 71,900 yuan on October 22, and further to 71,330 yuan on October 29. On November 1, the Cash-3M spread rose again to $438, and the spread for the month of November widened to $275. According to a Bloomberg report on November 2, over 17,300 lots of the November contract were still awaiting resolution, equivalent to 433,800 tonnes, nearly 14 times the available warrant volume. Not all open interest enters delivery, but before the November prompt date, sellers had to cover, roll, or find deliverable copper. The October 19 rule changes lowered the cost of overnight rolling but could not magically increase warrant volumes, so the squeeze pressure persisted. At the same time, the LME 3-month copper price had already fallen about 10% from its October high. This may seem contradictory, but it reflects two separate pricing logics: slowing manufacturing, property risks, and expected Fed tapering were suppressing the absolute price of copper, while the shortage of warrants continued to boost the nearby premium. Compared to October, the squeeze was no longer characterized by a simultaneous rise in both price and spread but was instead contracting to the near-dated part of the curve. From November 2 to 12, the Cash-3M spread fell from $275 to $130, while warrants increased from 31,675 tonnes to 50,300 tonnes, and the cancellation rate dropped from 74.4% to 47.4%. The restoration of warrant volumes increased the supply of units that shorts could borrow or use for delivery, directly easing the nearby structure. The concurrent implementation of the Fed's tapering and the rise of the US CPI to 6.2% primarily weighed on the absolute price of copper. From November 15 to 17, the Cash-3M spread rapidly narrowed from the previous day's $130 to $32.50, $15.50, and $14.90, precisely covering the monthly prompt date on November 17. As open interest was gradually resolved through covering, rolling, or delivery, the delivery pressure associated with the concentrated expiry was significantly reduced. During the period of warrant recovery, total LME inventories were still declining. From November 1 to December 10, total LME copper inventories fell from 123,925 tonnes to 84,450 tonnes, while warrants increased from 31,675 tonnes to 80,350 tonnes, and cancelled warrants decreased from 92,250 tonnes to 4,100 tonnes. Reuters reported that during this period, LME warehouses received a total of 56,575 tonnes of copper. Of this, 27,675 tonnes were received in Hamburg and Rotterdam, 17,525 tonnes in New Orleans and Baltimore, and 7,875 tonnes and 2,350 tonnes in South Korea and Taiwan, respectively. We believe the reason warrants were willing to re-enter the delivery system was firstly the strong economic incentive provided by the extreme $1,100 premium. As long as one held copper meeting LME specifications, it was extremely profitable to register it as a warrant, sell the physical metal, or lend the warrant to capture the nearby premium. The rule change on October 19 altered the payoff structure for hoarding warrants. After the rules were implemented, new cancellations virtually stopped, and any new deliveries could be directly converted into market liquidity. Interestingly, Chinese copper exports ultimately did not become the main physical relief valve for the London squeeze. In mid-November, the market expected that Chinese smelters would deliver copper to LME warehouses en masse, similar to 2012. This expectation caused the forward curve to decline before the physical metal arrived. However, based on subsequent warehouse flow data, by mid-December, the copper received by LME in Asia remained limited. New inventories primarily entered European and US warehouses, and the anticipated mass delivery of Chinese copper did not materialize on a large scale. China itself was not in a loose state at that time. On November 19, the domestic spot premium in China soared to 2,200 yuan, a record high. Imports of unwrought copper and copper products in November rose to 510,400 tonnes, the highest since March of that year. The direct trigger for the surge in the domestic premium was the customs authority temporarily suspending the issuance of payment receipts for import VAT. This caused some imported copper to be stuck in bonded zones. The market was short on physical units that could be cleared, invoiced, and delivered immediately. This, combined with the contract rollover, the backwardation structure in the SHFE copper market, and producers' reluctance to sell, pushed the spot premium to abnormal levels temporarily. It quickly retreated once the invoicing issue was resolved.

Key Takeaways from the 2021 Copper Squeeze Review

First, low inventories initially increase the time value of copper, with spreads often reacting faster than absolute prices. In retrospect, the market in October 2021 was primarily short of the warrants needed for immediate delivery, which drove the Cash-3M spread to $1,103.50. By November, while total LME inventories were still falling, warrants were gradually recovering. After the monthly contract delivery was completed, the Cash-3M spread quickly returned to zero. Second, low inventories can support and amplify price increases, but they struggle to determine the long-term direction of absolute prices. During the 2021 squeeze, the nearby premium was extremely high, but the 3-month copper price did not follow with a sustained rally. After the exchange adjusted its rules and warrants recovered, the market's focus quickly returned to China's property sector, manufacturing, and Fed policy. The slowdown in China's economy lowered copper demand expectations. The US CPI rose to 6.2%, leading the market to price in a faster exit from loose Fed policy. One factor impacts future copper consumption, the other changes the dollar, interest rates, and funding costs. The pressure from both sides ultimately outweighed the support from low inventories. Third, the market's perception of the 2022 supply-demand balance at the time also explains why the nearby squeeze did not develop into a longer-term rally. In October 2021, the ICSG projected that global copper mine production would grow by 3.9% in 2022, refined copper production would also grow by 3.9%, and refined copper consumption would grow by 2.4%, resulting in a surplus of 328,000 tonnes. Based on this, the market believed that the low inventories would be gradually replenished as projects like Kamoa-Kakula, Quellaveco, Spence, and Grasberg started up or ramped up. Looking back, the market's forecast for consumption was relatively accurate, but it was overly optimistic about supply. According to ICSG data published in December 2023, global apparent refined copper consumption grew by about 2.5% in 2022, close to the initial forecast. However, copper mine production grew by about 3.0%, and refined copper production grew by only about 1.8%, ultimately resulting in an apparent deficit of about 434,000 tonnes. More notably, even though the supply-demand outcome was tighter than expected, copper prices still fell in 2022 amidst the Fed's rate hikes and China's economic slowdown.