These latest developments have driven the spread between spot and the three-month contract on LME to at $145 per tons high today. A backwardation of this magnitude, which normally signals tighter conditions, was last seen last November. Adding to this a continued drop in inventories monitored by the three major copper futures exchanges in London, New York and Shanghai to 193,000 tons, the lowest since January, and speculators are beginning to have second thoughts about continuing to hold net short positions.
For the short-term prospect to improve further the recent pickup in demand from China needs to be driven by real demand. At this point it is unclear whether the increase purchases of copper are due a re-opening of the arbitrage window between LME and Shanghai, restocking or just simply a hedge against a weaker Yuan.
Having found support last week at $3.36/lb, after retracing 61.8% retracement of the July to August rally, copper is currently staring at resistance in the $3.54 area where recent lows and the 55-day moving average merges. For a real upside and trend reversal to occur the price needs to break above $3.78/lb while a break below $3.36/lb could see the metal take aim at $3/lb.