In May, Chinese copper exports soared to unprecedented levels, doubling year-over-year and surpassing the previous peak in 2012.
This surge is largely attributed to “export arbitrage,” where Chinese producers capitalize on the difference between higher international prices and lower domestic prices.
Deflationary Pressure from Chinese Exports
While copper prices reached a record high of over $5.10/lb on COMEX due to factors like tightening supply and rising demand from electric vehicles, AI data centers, and infrastructure projects, Chinese exporters have been exploiting the price discrepancy to export deflation amidst a sluggish domestic economy.
Short-Term Outlook for Copper Prices
Analysts at ING predict that copper prices will likely remain subdued in the short term unless the Chinese government implements substantial stimulus measures or Chinese smelters reduce output. Market participants are closely monitoring whether recent price declines will trigger increased buying from manufacturers, but doubts persist about a significant rebound in demand.
Market Analysis and Concerns
BMO Capital Markets’ Colin Hamilton noted that with Chinese smelters continuing to deliver cathode into bonded warehouses due to the open export arbitrage, it’s premature to declare the bottom of the current copper price cycle. Trafigura’s chief economist, Saad Rahim, has also voiced concerns about the recent price surge being unjustified by physical market fundamentals.
Production Adjustments and Market Crossroads
Bloomberg reported that while China’s smelters have started to scale back refined copper production from recent record levels, this is likely due to a global shortage of raw materials rather than a response to weak demand. The copper bull market now faces a critical juncture, with bulls needing further supply tightening and China needing to curb its supply influx for the “Next AI Trade” narrative to unfold.