The real reason for copper's record-shattering rally, according to one trading firm

• Copper's rise to more than $11,000 a ton isn't supported by fundamentals, according to trading firm Trafigura.
• The firm says the metal's supply-demand imbalance isn't a new dynamic.

Supply and demand fundamentals haven't been enough to support copper's sky-high rally. Instead, the commodity's massive bull run is thanks to expectations of interest-rate cuts, according to the commodity-trading firm Trafigura.

In a note attached to the company's 2024 half-year report, chief economist Saad Rahim pointed out that copper's low inventory has been an ongoing market feature, well before prices swung to an all-time high of $11,104.5 a ton last month.

Compared to this, copper stuck to a range of $8,200 to $8,600 a ton last year, even as demand increased for the supply-strained commodity, he said.

It was only after traders grew convinced that monetary policy would ease in 2024 that copper trading picked up, he noted, gaining as much as 28% at its year-to-date peak.

"That dynamic changed sharply in the first few months of 2024 even as Chinese growth slowed," Rahim wrote. "The prospect of Federal Reserve cuts at some point in the future, even if later and fewer than previously anticipated, changed the narrative and investment flows started to pick up."

In the months since, inflation and economic data disappointment have forced investors to lower their expectations for how many cuts the Fed could deliver this year, but a commodity rally has still been ongoing. The pattern isn't exclusive to copper only, as other metals have also disassociated from their fundamentals in 2024, Rahim said.

According to Bloomberg, Trafigura is an entrenched copper bull, forecasting in 2021 that the industrial metal could eventually hit $15,000 a ton. Given the deepening supply-demand disparity, that's a prediction also shared by commodities expert Jeff Currie.

Bolstering demand are fresh tailwinds, including the buildout of green energy infrastructure and a rising need for artificial intelligence data centers.

Meanwhile, supply prospects look dim for the near term. Even if demand weakens, tight inventories will remain a challenge, given a slew of delayed or halted mining projects.