In recent days, the copper futures market has experienced a rollercoaster of volatility, particularly trading on the Chicago Mercantile Exchange (COMEX). Following a series of short squeezes that sent prices soaring, copper futures have found some temporary respite. On May 21, copper futures reached a peak of $5.19 per pound before retreating to a low of $5.01. This slight downturn has been observed against a backdrop of broader market dynamics that have also seen London Metal Exchange (LME) copper futures experiencing a modest drop, closing at around $10,768 per ton.

According to Gong Ming, Vice Director of the Jinrui Futures Research Institute, the easing of price differentials has alleviated some fears surrounding market manipulation in the United States. This shift indicates a potential normalization within the market. Meanwhile, a narrowing in the contango structure of the LME has been noted, with an increase in domestic exports signaling a possible realignment of supply and demand across different geographical markets. Yet, this rebalancing process is complicated by current inefficiencies in transportation, which suggests it may take an extended period to fully materialize.

Nonetheless, the soaring prices of copper have not left the industry unscathed. Industry insiders report significant challenges in the cash market where many are struggling with procurement and hedging losses. The jumble of factors affecting cash flow and financial stability within various segments of the copper supply chain is influencing operational capacity dramatically.

Wang Yunfei, a non-ferrous analyst with Haitong Futures, pointed out that the rapid increase in copper prices is placing serious financial strain on numerous downstream industries. As the cost of raw materials skyrockets, many companies are facing budgetary constraints that limit their ability to proceed with crucial projects, leading to delays and even halts in production schedules.

As copper prices have fluctuated, the market witnessed a minor retreat in prices on this particular trading day. However, Zhu Bin, Chief Economist at Nanhua Futures, argues that this drop should not be interpreted as a peak in pricing. He explained that tight supply conditions are fundamental to the sustained upward trend in copper prices. Unless a significant and adverse fundamental shift occurs, prices are likely to continue their upward trajectory amidst current market conditions.

The consequences of skyrocketing copper prices have rippled through the entire copper industry chain, leading to both benefits and challenges across various sectors. The influx of profits at mining operations has enabled companies to exploit lower ore grades, thereby increasing the overall viability of mining operations and rewarding shareholders. However, the midstream smelting sector is facing its own set of difficulties.

Smelting operations primarily profit through processing fees and thus do not benefit directly from higher copper prices. Rising copper costs necessitate greater operational capital, consequently inflating finance-related expenditures and exposing firms to greater volatility and the risk of downstream customer defaults. Additionally, a decline in processing fees associated with zero-sum procurement adds further pressure on smelters, complicating profitability even more.

The situation becomes increasingly complex for downstream processing industries, especially those tied to the electric power sector, such as wire and cable manufacturing. Here, intense competition and market saturation are predominant issues. The resultant increase in copper procurement costs is negatively impacting the operational efficiency of these businesses and their ability to compete in global markets. Some have reduced their purchasing levels or even ceased operations altogether due to rising financial pressures and price volatility.

Analyzing the situation more broadly, Wang Yunfei noted that the recent surge in copper prices has multifaceted impacts on domestic enterprises. Firstly, there’s the challenge of increased capital tied up in daily operations, alongside heightened financial stress from futures market losses for those engaged in hedging activities. With procurement cycles disrupted, many smaller companies are scaling back purchases, resulting in rising inventories and potential cash flow issues that could threaten financial viability over the longer term.

The surge in copper prices in 2024 is illustrated by statistics indicating price increases of 26.7% for Shanghai copper and 27.3% for London copper. Manufacturers in the A-share appliance sector are already feeling the pinch of soaring raw material costs.

For instance, Boss Electric (002508.SZ) reported a staggering 69.8% decline in net cash flow for the first quarter of 2024, with gross margin dipping to 50.65%, a drop of 4.14 percentage points from the previous year. Similarly, Supor (002032.SZ) recorded a gross margin reduction, slipping 0.8 percentage points to 24.42% in Q1 2024.

Gree Electric (000651.SZ) emphasized in its 2023 annual report that the company’s operational costs are highly sensitive to fluctuations in raw material prices, including various grades of copper, steel, aluminum, and plastics. Labor cost inflation has further compounded these challenges, negatively impacting gross profit margins.

As the demand for copper continues to rise coupled with supply constraints, many analysts agree that the price of $11,000 per ton is not likely to be a peak. Recent assessments reveal that copper mining operations globally face significant operational hurdles, which prop up prices amid rising demand.

The COMEX copper futures main contract showcased a dramatic uptick starting May 9, culminating in historical highs as the contract tested around $5.128 per pound and subsequently broken records, reflecting a cumulative increase of over 12% within the month alone.

With LME copper prices also surging past $11,104.5 per ton, it seems the upward momentum will persist. Market analysts anticipate that the immediate future for copper prices remains bullish, given the challenging supply-demand dynamic, with investment and inventory levels still at odds. Limited quantities available for delivery by July further exacerbate this tension.

Positioning in the copper market suggests that non-commercial long positions have increased, with reports indicating a rise in net long futures contracts. As of early May, these positions accounted for 20.8% of total holdings, a clear indication of bullish sentiment prevailing amongst traders.

Amidst the excessive liquidity flooding into this market, analysts are cautious about potential downside risks forming. With economic unpredictability and the increasing global financial bubble surrounding copper, companies engaged in the sector are advised to heighten their vigilance with regard to price risks amidst the ongoing marketplace tumult.