Copper Short Squeeze: A Key Lesson for the Rare Earths Market

The recent short squeeze in the London Metal Exchange (LME) copper market demonstrated how trade policy can trigger a sharp price rally even in the absence of a global supply shortage.

Expectations that the United States would impose import tariffs on refined copper sharply widened the premium of the U.S. market (CME/COMEX) over the LME, redirecting a significant share of global copper flows to North America. As deliverable inventories on the LME declined, the market faced not a shortage of copper itself, but a shortage of metal available for physical delivery against exchange contracts.

By the August contract settlement, the aggregate size of large long positions exceeded the amount of copper actually available within the LME warehouse system. Short sellers were forced to source physical metal to meet delivery obligations, triggering a sharp expansion in backwardation and a classic short squeeze. Within days, the arrival of more than 38,000 tonnes of copper into LME warehouses eased the supply pressure and returned market spreads to more normal levels.

The implications extend well beyond the copper market. The episode highlighted that, in an era of geopolitical fragmentation, prices are increasingly driven not by global production volumes but by the availability of material at specific delivery points. Trade barriers and shifting logistics can create localized supply imbalances even when the global market appears fundamentally balanced.

The lesson is particularly relevant for the rare earths sector. The key constraint is no longer the availability of raw materials, but access to processed products required by downstream manufacturers. China's export restrictions and its dominant position in rare earth separation and processing make the market especially vulnerable to disruptions across critical supply chains. Unlike copper, however, most rare earth materials are not traded on major exchanges, meaning market stress is more likely to appear through soaring physical premiums and over-the-counter prices than through a classic exchange-driven short squeeze.

Andrievskii Verdict

The copper short squeeze is a reminder that, in today's geopolitically fragmented world, the value of critical minerals is determined less by the size of global reserves than by their availability to end users. For the rare earths market, this risk is even greater: concentrated processing capacity and export restrictions can trigger sharp price spikes despite the absence of a global raw material shortage. Investors should therefore focus not only on mining output, but also on trade policy, logistics, inventory structures, and the availability of processed materials. These factors—not traditional assessments of supply and demand balances—will increasingly determine price dynamics across the critical minerals market.

Aleksei Andrievskii | Advisory Board Member, Bendura Bank AG | Liechtenstein