The London Metal Exchange copper market is experiencing severe turbulence, with spot prices surging above futures prices, indicating a large-scale withdrawal of inventories is underway. At the heart of this battle between bulls and bears is the conflict between massive long positions held by three entities and the severely insufficient deliverable stocks, leaving short sellers facing delivery pressure or being forced to roll over their positions at a high cost. The premium for copper contracts expiring on Wednesday over those expiring the next day (the Tom/next spread) reached $64, with the single-day surge marking one of the largest increases since records began in 1998. As recently as Monday, the spread was in a narrow backwardation state; the reversal within just two days highlights the extreme market tightness. LME data shows that as of last Thursday, the cumulative long positions held by three independent entities accounted for at least 30% of the open interest in the January contract. If held to expiration, these positions would entitle the holders to over 160,000 tons of copper—a figure that already exceeds the total amount of readily deliverable inventory within the LME warehouse network. Traders holding short positions must deliver physical copper to settle, or face massive losses during the rollover process. The spot premium signals an inventory battle. The Tom/next spread is a key indicator for measuring immediate demand within the LME warehouse network, and its sharp fluctuations typically occur just before a monthly contract's expiry. This spike in the spread coincided with the expiration of the January main contract on Wednesday, providing traders with a final window to adjust their positions. A spot premium structure implies rising immediate demand or tightness in deliverable stocks. In the current scenario, the 160,000-ton position locked in by the three entities starkly contrasts with the limited deliverable inventory, forcing short sellers to either find physical copper for delivery or pay a hefty premium cost to roll their positions to the next month. This "physical squeeze" situation has left short sellers in a passive position. Structural supply tightness extends to 2028. While it is not uncommon for the Tom/next spread to show a spot premium before a monthly contract expires, the longer-term spread structure indicates that the copper market faces deeper supply constraints. Most monthly spreads in the LME copper market show a spot premium state until the end of 2028, reflecting market expectations of future supply shortages. Many analysts and traders anticipate that the copper market will fall into a significant supply deficit by 2028. This trend could deplete global inventories and drive prices substantially higher. Earlier this month, copper prices surged to a record high above $13,400 per ton, reflecting multiple factors including disrupted mine output, supply tightness in other regions due to surging US imports, and investor bets that AI industry development will boost demand. Imbalanced geographical distribution of inventories exacerbates tightness. Global copper inventories are currently at adequate levels overall, but their regional distribution is severely unbalanced. A significant portion of inventory is concentrated in US warehouses, a result of traders shipping record amounts of copper to the US in anticipation of tariff policies. This "once-in-a-lifetime" arbitrage opportunity stemmed from a price surge on the New York Comex exchange, but the recent spike in LME spot prices has now pushed US futures into a backwardation. This week, previously vacant LME warehouses in New Orleans began receiving small batches of copper deliveries; the soaring Tom/next spread may incentivize more copper to flow into US warehouses. LME data indicates that, as of last Thursday, approximately 20,000 tons of privately held copper were readily available for delivery to New Orleans and Baltimore, with over 50,000 tons of additional inventory located in off-warrant warehouses across Asia and Europe. On Tuesday, LME copper inventories increased by 8,875 tons to 156,300 tons, primarily from deliveries into Asian warehouses and a small inflow into New Orleans. Despite the wild swings in the spread structure, the benchmark LME three-month copper contract was relatively unaffected, as prices fell by as much as 1.4% on the day, dragged down by a broad sell-off in equities triggered by President Trump's push for control over Greenland.
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