Copper Prices Slump Amid Fed Rate Hike Expectations and Tight Supply

Copper prices have taken a hit due to conflicting market signals. On one hand, strong US jobs data has increased expectations of a Federal Reserve rate hike in September, which tends to put pressure on commodities. A stronger dollar and higher financing costs can cool demand for copper, ultimately weighing on its price.

However, the supply story is telling a different tale. The US has seen a record influx of copper imports in July, with buyers stockpiling metal ahead of possible import tariffs. This has effectively drained inventories elsewhere, particularly in China and London.

The Shanghai Futures Exchange warehouse stocks have fallen by 13% to 63,000 tons last week, while London Metal Exchange inventories are also edging down. Galaxy Futures, a Chinese brokerage, warns that continued inflows to the US can still leave traders who sold copper short scrambling to source deliverable metal.

The COMEX-LME price gap has narrowed to just above $300 a ton, with some 'short squeeze' fears cooling down. Nevertheless, the risk of a short squeeze remains, particularly for traders holding short positions on nearby supply contracts.