Trafigura, IXM caught in COMEX copper short squeeze as prices hit record

By Julian Luk, Pratima Desai and Siyi Liu

LONDON/BEIJING (Reuters) -Commodity traders Trafigura and IXM are looking to buy physical copper to deliver against large short positions on U.S. exchange CME where copper prices soared to record highs on Wednesday, five sources with direct knowledge of the matter said.

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.

Copper prices on COMEX, part of the CME Group, hit a record peak of $5.1775 a lb or $11,414 a metric ton on Wednesday, a gain of 28% so far this year and 14% over the last week. They were down 0.3% at $4.9375 at 1644 GMT.

"Trafigura is one of the largest physical suppliers of copper to North America and given the premium in this market we are shipping larger quantities of the metal to COMEX," the Swiss-based trader said

Geneva-based IXM, owned by China's CMOC Group, declined to comment.

"We continuously monitor our markets, which are operating as designed as market participants manage copper risk and uncertainty," the CME said in response to a request for comment.

COMEX copper prices are expected to keep climbing until shipments of the metal used in the power and construction industries from South America and Australia arrive in the United States. It could be many weeks before short positions can be cut, the sources said.

"Copper supply, demand fundamentals in the U.S., while not unsupportive, probably don’t justify such extremes, suggesting something else is happening in the paper market," said CRU analyst Robert Edwards.

Swiss-based commodity trader IXM is one of the world's largest traders of physical non-ferrous metals.

Trafigura has asked some copper producers to divert May and June shipments to the United States, the sources said. But changing destination at short notice is extremely difficult.

The COMEX copper rally has outpaced gains on the London Metal Exchange (LME) and created an arbitrage opportunity, when copper producers and traders sell commodities in different locations to take advantage of price differentials.

"We think arb-related and outright short covering has fuelled COMEX gains which are likely unsustainable: redirection of physical units to the US should ease the arb dislocation, but this will take some time," Citi analysts said in a note.

Copper prices on the LME are trading around $10,240 a ton.

Taking into account costs such as freight and insurance, traders can make around $300 a ton by taking copper from the LME system and delivering it to the CME, one source said.

However, the problem is half of the available copper in LME registered warehouses is of Russian origin and cannot be delivered into the CME system.

Elsewhere, several Chinese copper importers had redirected shipments to the United States, according to two of the sources.

But copper cathode from China, which smelts about half of the world's copper, cannot be delivered against COMEX contracts.

(Reporting by Julian Luk, Pratima Desai, Siyi Liu and Eric Onstad; Editing by Veronica Brown, Jane Merriman and Mark Potter)