NextFin News - Copper is holding its ground on Wednesday as traders wait for the Federal Reserve's interest-rate decision, but the metal is no longer being carried by the panic that sent it to record highs in August. The physical squeeze that pushed the London Metal Exchange cash-to-three-month spread to nearly $550 a tonne - its widest gap in more than five years - has unwound, with inventories rebuilding, the spread collapsing toward the low hundreds, and the COMEX-LME arbitrage narrowing to the point of inversion. The question now is whether the copper bull market was built on a structural mine-supply deficit that is still intact, or on a cyclical inventory squeeze that has just mean-reverted.
The answer matters because copper is up roughly 38% over the past year, trading at $6.38 a pound as of Tuesday's close, and the market is being asked to decide what part of that rally is permanent. The Fed's move, due at 2 pm Eastern on Wednesday, will set the dollar and discount-rate backdrop; the inventory data will set the physical floor. This piece argues that the squeeze was cyclical but the deficit is structural - and that the two are being confused in the current price action. The traders who made money on the backwardation have mostly been paid. The traders who make money on the deficit are still waiting for their pitch.
The Situation: A Squeeze Unwinds While Prices Hold
Copper rose 0.82% to $6.38 a pound on September 15 - up 0.82% on the day, paring some of a 3.37% monthly decline but leaving the metal 37.60% higher than a year earlier. The all-time high of $6.83 a pound, touched in August, now sits about 7% overhead - roughly $15,050 a tonne in LME terms. On the LME itself, three-month copper traded near $14,065 a metric tonne on Monday, down 1.2% on the session and down from roughly $14,430 a week earlier, as the metal gave back part of its squeeze premium.
The mechanics of the unwind are visible in the spread structure. In mid-August, spot copper traded as much as $543.50 a tonne above the three-month contract, the widest premium since 2021, as short sellers scrambled to buy back contracts ahead of expiry. Cash settled at $14,545 against $14,134 for three-month. By August 19, after on-warrant inventories surged more than 50% in three days - a jump of about 63,000 tonnes - the backwardation had fallen 60% to around $176 a tonne from $436 at Monday's close. The Shanghai Metals Market reported on September 15 that LME inventories stood at 249,225 tonnes on September 14, up 6,325 tonnes in a single day, and that nearby contracts had shifted into contango. The same report noted that the COMEX 2610 contract had inverted against the LME three-month contract, a sign that the US pull on global copper is fading.
There is a simple economic mechanism behind this reversal, and it is worth stating plainly: a $550-a-tonne premium for immediate delivery is a financial incentive strong enough to move metal across oceans. When nearby prices spike that far above forward prices, holders of physical copper - traders, fabricators, anyone with metal sitting idle - have a strong incentive to deliver into LME warehouses and pocket the spread. That is exactly what happened in mid-August. The deliveries flooded in, the premium collapsed, and the market learned that the shortage was a shortage of deliverable metal in one place at one time, not a shortage of metal in the ground. That distinction is the entire story.
That is the cyclical leg, and it is nearly complete. What remains unresolved is the structural leg: the mine-supply deficit that predates the squeeze and, on current evidence, outlasts it.
The Structural Deficit: Why the Floor Has Not Collapsed
The single most important fact about the copper market in 2026 is not that inventories fell in July; it is that the world's second-largest copper mine effectively stopped producing. Freeport-McMoRan's Grasberg mine in Indonesia was hit by a mudslide on September 8, 2025, killing workers and halting operations. The company declared force majeure, said fourth-quarter output would be "insignificant," and cut its 2026 sales guidance by 35%. By May 2026, Freeport had pushed the restart back another year: the mine now expects to produce 700,000 pounds of copper this year, down from the 1-billion-pound target in its fourth-quarter forecast, and full capacity is not expected until early 2028.
"Operations are currently in the recovery phase following the GBC underground mine incident, with production currently at around 40% to 50%," Freeport Indonesia chief executive Tony Wenas said in the company release. "The company targets a return to full capacity by early 2028."
Grasberg is not an isolated incident. Chile, the world's largest copper producer, saw national output fall 9.04% year-on-year in March 2026 to 434,314 tonnes, according to government agency Cochilco. Codelco, the state producer, was down 10%; BHP's Escondida fell 15.75%; and the Glencore-Anglo American Collahuasi joint venture declined 10.80%. When the top producing assets in the top producing country all contract simultaneously, that is not a quarterly blip - it is a regime change in the supply curve. Benchmark Mineral Intelligence estimates Grasberg's cumulative loss through the end of 2026 at nearly 600,000 tonnes of contained copper, roughly equal to the entire annual output of Collahuasi, the world's third-largest mine.
The tightness is most visible in the concentrate market, where the pricing power has flipped from smelters to miners. The annual benchmark for copper concentrate treatment and refining charges was set at zero dollars a tonne for 2026 - the lowest annual benchmark on record - and spot charges fell further to negative $126.80 a tonne at the end of June. In plain terms, smelters are paying miners to take their ore. Columbia University's Center on Global Energy Policy reports that China's largest smelters cut production by more than 10% in 2026 in response to the negative processing fees, and the government has halted some new smelter construction. Yet charges remain negative, which means smelter curbs have not cleared the market: mine supply is still the binding constraint.
This is the mechanism that keeps a floor under copper even when the squeeze premium evaporates. The LME spread tells you about metal sitting in warehouses this month. The TC/RC tells you about ore that will not exist for the next two years. Confusing the two is the central error in the current bearish read of copper. A backwardation can be arbitraged away in a week by moving metal into a warehouse. A mine that will not reopen until 2028 cannot be arbitraged at all.
The Fed Backdrop: A Stronger Dollar Cuts Both Ways
Into this setup steps the Federal Open Market Committee, concluding its two-day meeting on Wednesday with the rate decision due at 2 pm Eastern, followed by Chair Kevin Warsh's press conference at 2:30 pm. The Fed last held the target range for the federal funds rate at 3.5% to 3.75%, a unanimous 12-0 vote at its June meeting. Market pricing for this meeting is heavily weighted toward a 25-basis-point hike: rate-probability trackers derived from federal funds futures showed an 85% implied probability, and Kalshi prediction markets priced an 86% chance of a hike, 13% of a hold, and 1% of a cut as of September 14.
The bond market has already moved ahead of the decision. US Treasury yields climbed to 16-year highs, with the 30-year yield reaching as much as 5.40% - its highest level since June 2007 - and the 2-year yield rising about 4 basis points to 4.68%. A stronger dollar and higher real yields are headwinds for dollar-denominated commodities: they raise the carrying cost of inventory and make copper more expensive for non-dollar buyers. That is the first-order effect, and it is why copper-linked equities fell 2% to 4% on September 1, when a firmer dollar and rising bets on Fed tightening hit industrial metals broadly.
But there is a second-order channel that matters more for copper than for gold. Copper is not just a currency hedge; it is a claim on global industrial demand. If the Fed hikes because growth is still hot, copper demand holds and the dollar effect is a speed bump. If the Fed hikes into a weakening economy and tips it into recession, the demand destruction dominates any supply support. The market is currently pricing the hike as a sign of confidence in growth; the risk is that it turns out to be a policy error that kills the very demand copper needs. This is why the Fed decision matters more for copper's direction than for its floor - the floor is set by Grasberg and Chile; the ceiling is set by growth expectations.
There is also a third-order effect that few traders are discussing: the interaction between the rate path and the inventory rebuild itself. Higher rates raise the cost of carrying copper in warehouse, which encourages holders to sell inventory into the market rather than sit on it. That is precisely the behavior that produced the 6,325-tonne inventory build on September 14. In other words, the Fed's tightening may be doing part of the work that a demand slowdown would otherwise do - drawing metal out of storage and into consumption, which supports the physical market even as it pressures the paper price. This is the mechanism by which a hawkish Fed can be simultaneously bearish for the headline price and supportive for the underlying balance.
The Tariff Distortion: COMEX, LME, and the US Pull
A third force has been reshaping copper flows: US trade policy. On July 9, 2025, the administration announced a 50% tariff on all imported copper under Section 232 of the Trade Expansion Act, effective August 1. A June 1, 2026 proclamation modified the regime through December 31, 2027, and Customs and Border Protection issued implementation guidance on June 5. The result has been a distortion of global trade flows: US copper imports hit a 12-year high as buyers front-ran the tariffs, drawing metal out of LME warehouses and into COMEX sheds.
That arbitrage is what made the COMEX-LME spread a live gauge of Washington's next move. When the spread is wide, the market expects the tariff to bite; when it narrows or inverts, as it has recently, the market is pricing a lower probability of enforcement. The Shanghai Metals Market report on September 15 explicitly linked the narrowing, inverting spread to a "decline in the US pull effect on copper." This is not a fundamental improvement in supply; it is a repricing of policy risk. If the tariff is reimposed or tightened in 2027, the flow reverses and the squeeze can reappear in a different form - this time in the US rather than in London.
The tariff also explains why the copper rally has been so uneven across exchanges. COMEX futures touched the equivalent of roughly $14,770 a tonne in late August, while LME three-month metal came within reach of its January high near $14,527 a tonne - the US market consistently trading at a premium that reflected the tariff risk rather than any difference in physical availability. When that premium collapses, as it has this week, it looks like copper is weakening. In reality, only the policy risk premium is weakening. The global metal is unchanged.
The Counter-Thesis: What Would Prove the Bulls Wrong
The strongest case against copper is not that the squeeze was fake; it is that the squeeze was the whole story, and what follows is a surplus. The International Copper Study Group forecasts a 377,000-tonne refined surplus in 2027 as restarting mines return concentrate to the market. If Grasberg comes back to full production in early 2028 as Freeport has guided - or earlier, if the recovery accelerates - and if Chile's output stabilizes, the structural deficit call breaks down. The bear case is reinforced by the inventory data: once metal starts flowing back into LME warehouses at a rate of 6,000 tonnes a day, it is hard to argue that physical scarcity is driving prices.
There is also the demand side. Copper's 38% year-over-year gain has been achieved despite, not because of, a slowing global manufacturing cycle. If the Fed's tightening tips the US into recession and China's property sector continues to contract, copper demand could fall faster than supply. The metal is priced for a soft landing; a hard landing would reprice it sharply lower, regardless of the mine-supply story. China's smelters, already cutting production under negative processing fees, are the canary: if refined output falls faster than mine output, the deficit narrows from the demand side even if the mines never recover.
The falsifying signal is specific: if LME inventories keep rising through the fourth quarter of 2026 and the cash-to-three-month spread stays in contango while COMEX stocks continue to build, the squeeze thesis is dead and the market is moving toward the International Copper Study Group's surplus forecast. A second falsifier: if Grasberg returns to more than 80% of capacity by mid-2027 and Chile's output stabilizes, the structural deficit call is wrong. Until those signals print, the burden of proof sits with the bears.
Outlook: Three Horizons, Three Different Trades
Short term (weeks): Copper is likely to trade range-bound around $6.20 to $6.60 a pound as the market digests the Fed decision and the inventory rebuild. The immediate risk is a stronger dollar pushing the metal toward the bottom of that range; the immediate support is the still-tight concentrate market. A 25-basis-point hike priced at 85% is unlikely to surprise; the reaction will come from the statement language and the press conference. If the Fed signals further tightening beyond this meeting, expect a test of $6.00 a pound, or roughly $13,200 a tonne.
Medium term (6-12 months): The balance tilts modestly higher if the Fed's hike proves to be preventive rather than reactive. The structural deficit - Grasberg offline, Chile contracting, negative TC/RCs - should reassert itself once the squeeze premium has fully evaporated. The base case is a retest of the $14,000 to $14,500 a tonne zone, with upside toward the August high of roughly $15,050 a tonne if the dollar weakens and demand holds. The key watch item is the spread: if the cash-to-three-month structure returns to backwardation as inventories stabilize, the squeeze is not over - it has merely paused.
Long term (2027 and beyond): This is where the call is genuinely binary. If mine supply returns as scheduled, the International Copper Study Group's 377,000-tonne surplus forecast becomes the dominant narrative and copper gives back a meaningful part of its 2025-2026 gains. If Grasberg's return slips further into 2028 or beyond, or if Chile's ore grades continue to decline, the deficit extends and the market enters a multi-year period of underinvestment-driven scarcity. The long-term investor is not betting on copper; they are betting on whether mining companies can execute.
The beneficiaries of the structural case are clear: miners with low-cost, permitted assets in stable jurisdictions, and the equipment and services companies that supply them. The exposed are the standalone smelters, whose margins are already negative at current copper prices, and the downstream manufacturers who have yet to pass the 2025-2026 price increases through to their customers. A reversal of the US tariff policy would flip the geography of the winners and losers, rewarding US buyers and punishing exporters into the US market.
Copper's squeeze has ended; its deficit has not. The market spent August pricing a shortage of metal in warehouses, and it was right to do so. It is now spending September deciding whether there is a shortage of metal in the ground. Those are different questions, and the answer to the first one is no longer doing the work of the second. The Fed will decide the direction; Grasberg and Chile will decide the floor. And the traders who understand the difference between a backwardation and a deficit are the ones who will still be in the market when the answer arrives.
Explore more exclusive insights at nextfin.ai.
