Tight supplies from copper mines and the looming threat of a worsening global deficit rocketed copper prices from February to June, and the AI trade, which drove momentum from speculative traders, pushed prices even higher. But in recent weeks, prices have tumbled, breaking a critical trend line that has been intact for months. Now, prices are teetering on a knife-edge, with trading desks and hedge funds speculating on what comes next. 

Let's begin with comments from the world's top copper trader - and as Bloomberg's Jack Farchy puts it, "usually one of the market's most bullish voices" - who called the price surge unjustified due to real-world supply. 

"Prices of non-ferrous metals have moved much higher than fundamentals in the physical spot market might indicate or justify, especially for copper," Trafigura Chief Economist Saad Rahim wrote in a note with first-half results on Thursday. 

Rahim pointed out that copper's speculative surge in the first half of the year was primarily linked to "investment flows." However, he does believe the closure of First Quantum Minerals Ltd.'s mine in Panama will eventually tighten global supplies. 

He wrote that sliding mine supply "has led to a significant concentrates shortage, resulting in smelters having to cut production and pointing to tighter inventories of refined metal even if demand is lackluster."

Copper prices on the London Metal Exchange on Friday fell to $9,652 a ton, down 11.5% from the all-time high of $11,104 in May. Furthermore, prices have breached a multi-month ascending trend line, which is happening as the top consumer of copper, China, has printed dismal economic data. 

"Specs got in from Feb, fast money chased in March (AI narrative emerged), April we saw consumers really step back (above 9k) and scrap volumes picked up, May was financial FOMO and stop outs and we saw a pickup in producer hedging. Feels to me like the 2023 range steps a good $1500 higher for now, the low of that range will be what we settle next couple of weeks and the higher end will be the stop out top (10k to 11k give or take)," Goldman's James McGeoch wrote in a note to clients on Friday. 

McGeoch said, "The numbers I hear most is $14-15k. Think this gets the project running, then you drift back to marginal cost." 

Then there are hedge funds Rokos Capital Management and Andurand Capital Management, which bet that prices could rally significantly from current levels.

Per Bloomberg: 

Rokos has made a flurry of options purchases in the past several months in a bet that copper could rally to $20,000 or more over the next few years, according to people familiar with the matter. At Andurand, copper was the biggest position by market exposure at the end of April, and the trader has recently predicted that prices could hit $40,000. Those targets are well beyond the forecasts of even the most bullish Wall Street banks.

Last week, Andurand told clients in a letter that its main commodities funds were up between 13% and 30% in April, primarily because of its bullish copper bets. 

"We believe that we are at the beginning of the copper bull-market and that the recent move higher in prices is just the start," Andurand wrote,adding, "Copper faces a decade-long supply deficit driven by the confluence of increasing demand due to the energy transition and persistent underinvestment in mine expansion."

In April, David Einhorn's Greenlight Capital said it had made a "medium-sized macro position to benefit from higher copper prices." 

"Our thesis now is that copper supply is about to fall short of demand, forcing prices substantially higher," Greenlight said in a letter to clients, adding, "We think the best way to invest in that thesis is the most direct way — in this case through options on copper futures."

Goldman's McGeoch said, "A supply shock doesn't get the price from $10,500 to $12,000. It's what takes us from $15k to $20k." 

Also, Jeff Currie, who led commodities research at Goldman for nearly three decades, recently told Bloomberg's Odd Lots that copper "is the most compelling trade I have ever seen in my 30 plus years of doing this."

Despite China's souring recovery, copper bulls believe the market will tighten as global industrial activity increases, central banks pivot to looser monetary policy, and mining companies struggle to ramp up production. This comes as demand rises due to electric vehicles, renewables, reshoring trends, and AI data centers, as the copper squeeze is likely to reignite again. 

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