China demand for refined copper depletes stocks, risks short squeeze

By Violet Li and Lewis Jackson

NANCHANG/BEIJING, April 24 (Reuters) - China's copper consumers are increasingly turning to refined copper because of tight scrap supplies, six traders and analysts said, and are rapidly burning through stocks, raising concerns about a short squeeze in the market as prices rise.

Short positions can be bets on lower prices or producers hedging their output. A short squeeze occurs when parties holding such positions are forced to buy them back at a loss or deliver physical copper to close them out.

Some copper manufacturers, making rods or wire pipe, for example, usually use scrap metal. But a tight scrap market, made worse by falling U.S. imports due to an escalating trade war, is leading them to opt instead for pricier refined copper.

The shift is driving a rapid decline in refined copper inventories at the Shanghai Futures Exchange (SHFE), according to Mysteel analysts. LSEG data showed SHFE stocks fell 36% to 171,611 metric tons between 7 March and April 18, the fastest decline since March 2023.

SHFE copper stocks rose 25% over the same period last year.

The pace of the inventory drawdown is creating concerns about a potential short squeeze, three traders told Reuters, on condition of anonymity.

"Drawdown speed is very high and we are worried about a short squeeze，especially when the copper premium at COMEX has attracted a lot of copper shipments to the U.S.," a trader said.

Copper prices on COMEX, where metals contracts are traded in the U.S., have risen due to the threat of tariffs by the Trump administration on copper imports. More copper is being diverted to the United States.

On the SHFE, the premium for the front-month May copper contract SCFK5 over the October contract SCFV5 was 1.2%, compared with 0.75% in late March.

Stock drawdowns were likely to cause the premium, also known as backwardation, to widen, Yan Gu, Head of the Electrolytic Copper Department at CITIC Metal said on Wednesday at a conference in East China's Nanchang.

U.S. scrap imports, the largest source last year, dropped 16% year-on-year to 93,215 tons in the first quarter, customs data showed.

While scrap imports rose 2.7% year on year in the first quarter, manufacturers face fierce competition from smelters seeking alternative feedstocks because of a shortage of copper concentrate, their usual input.

($1 = 7.2930 Chinese yuan renminbi)