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London — The global copper market was this week weighing up whether prices have got ahead of themselves, defying fundamentals that show a divergence in physical and paper trading, sources said.

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The London Metal Exchange copper price has been on a tear over the past few weeks, spurred by China coming out of pandemic-induced lockdown and swathes of stimulus from global central banks, chiefly the US Federal Reserve and People's Bank of China.

Copper had been hammered down towards $4,300/mt in March, as stock markets went into free-fall as the pandemic took hold.

Since then, global equities have been soaring, primarily because of unprecedented fiscal stimulus. Many now argue that stock markets are overvalued, with a deep correction probable as real-world economic signals paint a far more bearish outlook.

Still, for the time being at least, all bets were firmly on. LME three-month copper was spot bid around $5,700/mt as of 1330 GMT.

China's May imports of unwrought copper and copper products rose 21.1% year on year, but fell 5.5% from April to 436,031 mt, S&P Global Platts calculated based on data released by the General Administration of Customs on June 7.

The year-on-year increase was attributed to weak seaborne demand caused by the spread of the coronavirus pandemic outside of China and a recovery in domestic demand, sources said.

"Although copper imports fell slightly short of the previous month's level at 436,000 mt, they were 21% up year on year," Commerzbank analysts said.

However, due to recent national lockdowns in copper-producing hubs Chile and Peru, they added, China's imports of copper concentrate at 1.69 million mt were "well below both the month-on-month and year-on-year figures (17% and 8%, respectively)."

Shanghai Futures Exchange copper prices hit a three-month high June 5, but the support is not expected to last, with demand lagging the rise in supply and tensions continuing between the US and China, market sources said.

This was echoed by the China Nonferrous Metals Industry Association, which said Chinese copper prices might come under downward pressure as the recovery in consumption would likely lag that of supply in the domestic market, as demand outside of China remains lukewarm.

Meanwhile, tensions between the US and China will also weigh on copper prices, the association said.

Platts assessed Chinese copper import premiums at $75-$88/mt plus London Metal Exchange cash, C&F China, on June 3 for LME-registered brands of cathode, down $4 from a week earlier.

Copper rally 'crazy'

"The turnaround in the copper price is nothing short of crazy," a senior trader said. "Yes, sure, you'll get the bulls shouting about electric-vehicle demand, but come on, we're not in the future just yet. I know, it's coming, but so is Christmas, in December, and I haven't bought presents for that yet," he said.

On the subject of EV demand, broker Liberum said that it remains optimistic that copper can continue to slowly recover..."aided by fiscal stimulus, targeting renewable energy and electric vehicles, towards the back end of the year."

In a recent interview with Platts, American Pacific President Eric Saderholm said: "There is [a] push for electric vehicles. Electric cars are going to require around four or five times more copper per vehicle compared with a combustion engine vehicle, so there is going to be a huge amount of demand for that as well. Alternative energies are always very copper intensive."

The trader added: "In seriousness, though, much like the stock markets optimism and free money, which in reality is just debt, is fueling utter madness on the markets. I think people forget we are in recession, and that there is a lot of hurt being pushed down the road by central governments."

Broker Marex Spectron pointed out that the net speculative short positioning on the LME has reduced to about 2.2% of open interest as of close of business June 5.

At the start of April, net speculative short positioning was 24% of open interest, the highest since August 2018. That year the net speculative short position peaked at 30%, according to the broker.

"The call for a correction is understandable, [yet] we remain wary...with nothing in our data to suggest the markets should see a meaningful correction yet. Thus far, dips have been shallow and it's been a tough game picking tops," Marex added.

The LME three-month copper price increased 7.8% on the month to $5,601/mt June 4, according to S&P Global Market Intelligence's Metals and Mining Research team.

"Prices have increased in line with expectations, and the team therefore maintained its forecast for 2020 at $5,700/mt for the third consecutive month," S&P Global MI said.

Thomas Rutland, copper analyst at S&P Global MI, said: "We expect that mine closures [caused by lockdowns] and the resumption, albeit gradual, of economic activity in China will mean that total exchange copper stocks will not increase. We assess that the mine closures and the restarting of economic activity in China to be the reason why copper prices have been held up and are starting to slowly increase again."

'Risk-on' trade

TD Securities put the current leg higher more down to a correlation with risk-on trade in global equities.

"A fiery performance in risk assets is bolstering momentum signals and further supporting the base metals rally, fueled by a 'V-shaped' recovery highlighted in our real-time commodity demand indicator. It remains to be seen whether we will enter a 'gradual recovery' phase, which may temper the prevailing optimism surrounding the reopening [of global economies]," said TD Securities head of commodity strategy Bart Melek.

Adding to the bullish calls was broker Jefferies.

"Since April 29, copper is up 7.8% while gold is down 1.8%. The macro trends in place are indicating copper's run could accelerate. Copper demanded for delivery is surging, while a myriad of leading macro indicators are signaling China is recovering and the environment for copper and copper miners is extremely fertile. If these trends continue, we could enter a regime of copper miner outperformance," Jefferies said.