Why Copper Fever Is Breaking

But the moment passed: BHP never made a firm offer, and the LME spot price is down more than 14% from its peak.

One reason is that the spring run-up in prices was driven by speculators more than by users of copper. From the start of April to mid-May, copper futures in New York surged by 26.4% as traders and commodity trading advisors, or CTAs—many of which use algorithms to follow market trends—bet on a supply deficit. In London, the long position on the LME grew from around 5,300 lots in January to a high of 71,900 lots in mid-May, according to commodity data provider Fastmarkets (each lot represents 25 metric tons of copper). That put pressure on bearish traders who had sold short, creating a short squeeze.

But the rally also forced some industrial buyers to pull back. Investors have taken profits as hopes of a shortage have cooled somewhat.

The new trend has room to run, particularly with algorithms doing some of the selling. In mid-June, the LME’s long position remained frothy at around 47,000 lots, close to a previous high in early 2021. While a big chunk of that is sticky, says Max Layton, global head of commodities research at Citi, a concern remains around CTAs. If they keep selling, the price of copper could slide to $9,000 a metric ton by the end of the year, he estimates.

Then there is the underlying question of supply. Mining woes in South America and central Africa have led StoneX, a commodities brokerage, to lower their copper concentrate supply forecasts by 1.2 million metric tons over recent months.

Although the market was in a surplus for the first four months of the year, analysts say that will soon change. Citi expects copper demand to exceed supply this year and is penciling in a deficit of around 600,000 metric tons over the next three years. Goldman Sachs forecasts a shortfall approaching half a million metric tons in 2024 alone.

But a supply crunch isn’t guaranteed. The closure last year of one of the world’s largest copper mines in Panama after a court ruling has been one problem. If the mine were to reopen early next year, that would tip the market into a surplus of 1.8%, according to Deutsche Bank.

Meanwhile, the supply of copper scrap might exceed expectations. China has ramped up imports of the waste metal, taking in nearly a million metric tons in the first five months of 2024. Trying to map out where that supply comes from, and how much can be recovered, is a Herculean task, as copper scrap is often procured from obscure mom-and-pop shops. For now, though, it is clear that higher prices have made stripping out the metal from unwanted appliances a lucrative endeavor.

High commodity prices have a way of bringing obscure sources of supply to light. Prices of lithium, another much-hyped energy-transition metal, have collapsed from their late 2022 peak as unconventional mining operations have taken off in China and Africa.

For copper, Chinese demand is another swing factor. The country consumes more than half of the world’s copper and faces a deepening property slump. New-home prices in big cities fell 4.3% in May compared with a year earlier, worse than the 3.5% decline in April, according to China’s National Bureau of Statistics. With industrial production also wavering, Chinese copper inventories are at their highest level since 2020.

The world will need a lot more copper in its shift to renewable energy but don’t count out the incentives created by high prices. Copper might just be the latest example of a common pattern in commodity markets: The moment investors start to see anything as a sure bet, it unravels.

Write to Enes Morina at Enes.Morina@wsj.com