Historic backwardation signals market distress

Backwardation in metals markets typically suggests that buyers are scrambling to obtain physical supply. In copper’s case, a combination of logistical, geopolitical and structural forces is driving the surge.

LME stockpiles have been rapidly drawn down as traders and manufacturers shift metal to the US in anticipation of potential trade barriers, spurred by US President Donald Trump's tariff moves.

That migration has created acute shortages in Europe and Asia. Chinese smelters, responding to the price premium and slackening domestic demand, have begun exporting surplus copper to global markets. Yet those flows have not kept pace with the drawdowns, and China's own inventories have also dwindled.

The LME had hoped recent regulatory interventions would prevent another disorderly squeeze like the one that disrupted the nickel market in 2022. Last week, the exchange enacted new rules mandating that traders with large front-month positions offer to lend those holdings if they exceed available inventories.

The so-called “front-month lending rule” is meant to discourage hoarding and promote liquidity.

However, recent copper trading data suggest that no single trader is behind the current squeeze. On Monday, the Tom/next spread — a one day lending rate — spiked to US$69 per metric ton.

This would only occur if no one entity held enough copper to trigger lending obligations under the new rules, indicating the tightness is likely the result of broad-based market dynamics rather than manipulation.

LME tightens oversight

As mentioned, the LME has begun cracking down on oversized positions across its metals complex.

In a June 20 statement, the exchange introduced a temporary, market-wide rule to manage large front-month exposures. Under the updated rules, traders holding positions in the front-month contract for a metal that exceed the total available exchange inventories — excluding any stock they already own — must offer to lend those positions at “level,” meaning they are required to roll them over to the next month at the same price.

The rule aims to rein in aggressive moves by commodities trading houses that have made deep inroads into metals markets over the past year. The LME emphasized in its release that recent market interventions are targeted, adding that the newly introduced rule offers a standardized approach.

Still, the unprecedented depth of copper’s backwardation — now extending years into the future — suggests that broader supply/demand dynamics are at play, beyond what position limits alone can control.

For manufacturers and industrial users, the squeeze presents a serious cost and planning risk. Many rely on the LME as a pricing and hedging mechanism. But when exchange inventories drop this low, even large players can face trouble sourcing metal to meet contract obligations. With exchange-based supply nearly exhausted, companies may increasingly turn to off-market deals or bilateral supply agreements — often at higher prices.

This shift weakens the LME’s role as a central clearinghouse for global copper, and raises questions about its ability to handle future shocks, especially as energy transition policies boost long-term demand for the metal.

Market watchers will also be looking to the next moves from Chinese exporters, US trade policy under Trump and the LME’s enforcement of its new regulations.