Buoyed by trillions of dollars in stimulus packages, near-zero interest rates and surging global demand as the global economy recovers from coronavirus disease, copper prices last week topped $10,000 a tonne for the first time in a decade.
Copper has been one of the metals with the biggest price jumps.
However, copper is a crucial commodity for China's economic development, and the country's economy has been hit by a surge in copper prices.
Some Chinese wire makers have idled some equipment, delayed deliveries and even defaulted on bank loans, according to a survey by the Shanghai Metal Exchange.
At the same time, end users such as power grids and property developers have been delaying deliveries, with orders from both copper bar and tube producers falling sharply.
Copper is a very widely used non-ferrous metal in industrial production, almost all kinds of industries have a place for copper.
China, the workshop of the world, is the world's largest consumer of copper.
Domestic copper users are feeling the pain as they have been caught off guard by the recent price spike, with wire producers the hardest hit and smaller power plants keeping operating rates low as the price surge slows investment in the grid.
This is a clear indication that the laws of supply and demand are still at work somewhere as copper prices soar.
The rise in copper prices comes as Chinese spot buying of the metal has weakened sharply.
The latest purchasing managers' index for China's manufacturing sector fell in April and the service sector also showed weakness, suggesting the economy is still recovering but at a slower pace.
The picture
While China may be approaching the limits of demand, analysts at investment banks such as Goldman Sachs Group Inc. expect copper to gain further as the global economy picks up pace.
Spot prices fell 215 yuan per tonne from the main Shanghai futures contract this week, the biggest drop in 10 months and a sign that physical demand in China may be weak, Bloomberg noted.
Import demand is also falling, with the Yangshan premium paid over the LME benchmark falling to its lowest level since the data were first published in 2017.
In addition, Colin Hamilton, an analyst at BMO Capital Markets, said there are precedents for falling demand in China as prices rise.
Mr Hamilton points out that January to April 2006 saw the biggest price increase on record and a sudden, credit-fuelled acceleration in demand in the developed world.
Rising copper prices have dampened consumption in China.
2006 was the only year this century that China's annual copper consumption fell on an annualised basis, as the country's marginal buyers left.
If copper prices remain high or continue to rise, 2021 could be a second such year.
"Copper at $10,000 a tonne is in danger of collapsing demand, especially with these emerging trends of evolving material choices. There is no doubt that copper could be one of the best choices for power or heat transfer, but with the 'copper-aluminium ratio' now well above 3.5:1, which would accelerate substitution, the risks are clear."
While physical demand may be approaching its limit, financial demand for copper remains strong as speculators -- who never accept physical delivery -- prop up prices on the back of rampant leverage and trillions of dollars of central bank liquidity.
The question is when this artificially driven price will reach its limit, and whether the coming collapse in copper will be similar to the collapse in oil prices in the late summer of 2008, when Brent crude fell from $150 a barrel to $30 during the Lehman deleveraging.
Until then, we have to keep an eye on a new round of horror stories about "Chinese copper re-mortgaging" -- not only the most important commodity that underlies the Chinese economy, but also the key pillar behind hundreds of billions of dollars of Chinese copper financial transactions (CCFDs), such as:
In just four days at the end of February, mainland China Futures Economics built up a long position in copper contracts worth nearly $7 billion.
