Copper: The tug-of-war between spot tightness and weakening macro conditions

Overview

This report tracks the base metals market, focusing on the tug-of-war in copper prices between tightening spot fundamentals and a weakening macro backdrop. The report notes that low copper inventories in China, rising LME cancelled warrants, US imports pulling supply on tariff expectations, and restricted scrap copper circulation together support near-term tightness in ex-US copper markets. However, the Middle East situation, hawkish Fed pricing, and declining risk appetite triggered by sell-offs in AI-related chip stocks may still create short-term pressure on copper prices.

Core views

The core view is that spot tightness in copper is real, but the driver is not a broad-based strengthening in end demand; rather, it stems more from disruptions in supply and substitution chains. Stricter VAT enforcement on scrap copper in China is limiting domestic scrap circulation, prompting fabricators to use more cathode copper; at the same time, concentrated smelter maintenance is suppressing domestic cathode copper supply. Goldman Sachs expects the ex-US copper market to remain tight in the short term, with low inventories and limited scrap substitution buffering downside, but if the Middle East conflict escalates and raises concerns about inflation and rate hikes, copper prices would still face near-term downside risk.

Analysis framework

The report combines price decomposition, inventory and warrant analysis, import arbitrage, scrap substitution, smelter output, supply-demand tracking, and futures curve analysis. The price decomposition uses the China growth factor, the LME 3-month/12-month spread, the trade-weighted US dollar index DXY, and the GS AI Data Center Basket to assess the contributions of macro, spot, and AI narratives to changes in copper prices.

Methodology notes

• Price decompositionRegression decomposition of weekly copper price changes

  Breaks down copper price changes into the China growth factor, term spread, US dollar index, AI data center equity basket, and residual.

  The model regresses weekly copper price changes using weekly data from 2024 through the week ending July 17, 2026, and cumulatively presents the contribution of each driver since January 2025.

• Macro factorsGS Alternate China Growth Factor

  The China growth factor excludes copper prices themselves and is constructed from the first principal component of A-shares, H-shares, and China's long- and short-end interest rates.

  This factor is used to capture the impact of Chinese macro growth expectations on copper prices while avoiding directly including copper prices themselves in the explanatory variables.

• Spot marketChina import arbitrage

  Measures the incentive to import copper cathode into China using SHFE prices relative to LME prices while accounting for 13% VAT and other import costs.

  The report notes that China's copper import arbitrage has closed after briefly opening; a value above zero indicates an import incentive.

• Supply-demand substitutionSubstitution from scrap copper to cathode copper

  Restricted scrap copper circulation and weak secondary copper rod output will push fabricators to use more cathode copper.

  The report mainly attributes recent spot tightness in China to constrained scrap substitution rather than a significant strengthening in end demand.

• Inventory estimationGlobal copper inventory estimation

  When monthly US seaborne cathode copper imports are above or below 50,000t, unreported inventories are adjusted in conjunction with changes in US exchange inventories.

  This method is used to estimate global copper inventories and helps assess the crowding-out effect of US import pull on inventories in ex-US markets.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Copper

  Core asset under research

  Strengths

  Low Chinese inventories, constrained scrap substitution, tight supply in ex-US markets, and the AI power and grid demand narrative provide expectation support.

  Weaknesses

  Recent tightness stems more from substitution and supply disruptions than from broad-based strengthening in end demand; weaker macro risk appetite will weigh on prices.

  Comparison

  Copper and zinc outperformed aluminum and nickel over the past three months; LME copper has posted significant gains over the past year and is at a relatively high historical percentile.

  Risks

  Escalation of conflict in the Middle East, rising rate-hike expectations, correction in AI-related equities, changes in US tariff expectations, and the closure of China's import arbitrage.

• Aluminum

  A fellow tracked base metal asset

  Strengths

  Global visible inventories have declined since May, China's semi-finished exports rose 17% YoY in May, and Russian metal has boosted China's primary aluminum imports.

  Weaknesses

  Goldman Sachs expects aluminum prices to decline in 2027; aluminum consumption is contracting both in China and outside China, and import arbitrage remains closed.

  Comparison

  Compared with copper, aluminum has performed more weakly over the past one month and three months, while the LME aluminum forward curve has shifted lower and backwardation has narrowed.

  Risks

  Contracting consumption, widening scrap aluminum discounts, closed import arbitrage, and rising supply.

• Zinc

  Base metal for cross-asset comparison

  Strengths

  The LME zinc forward curve remains in backwardation, and LME zinc net longs have risen significantly recently.

  Weaknesses

  Global visible zinc inventories have increased over the past month, and China's zinc export arbitrage has closed.

  Comparison

  Zinc and copper have outperformed aluminum and nickel over the past three months, but zinc's inventory improvement is less tight than copper's.

  Risks

  Weak refined zinc output outside China, rising inventories, and crowded speculative long positioning.

• Nickel

  Base metal for cross-asset comparison

  Strengths

  Nickel surplus narrowed in the first half, and global stainless steel output is about 2% higher YTD than in 2025.

  Weaknesses

  Global visible nickel inventories remain above the historical seasonal range, and the LME nickel curve remains in contango.

  Comparison

  Nickel has underperformed copper and zinc, and LME nickel speculative positioning has fallen back to the 56th percentile.

  Risks

  High inventories, rising Indonesian nickel ore output, closed China import arbitrage, and insufficient demand recovery.

• AI data center-related equity basket

  Driver of copper price expectations

  Strengths

  The AI narrative is strengthening market expectations for future power, grid, and copper demand.

  Weaknesses

  Current data center copper demand accounts for only about 1% of total copper demand, so its immediate fundamental contribution is limited.

  Comparison

  The report says copper's correlation with AI data center equities has risen significantly since late 2025.

  Risks

  A sell-off in AI-related chip stocks could drag on copper prices through risk appetite and expectations channels.

Key data

• LME copper intrawEEK highabout $13,640/tDriven by stronger spot tightness signals, a rapid decline in Chinese inventories, and rising LME cancelled warrants.
• LME copper Friday close$13,526/tIt had fallen toward $13,400/t intraday as risk appetite weakened, before recovering.
• Visible Chinese copper cathode inventories167ktAt the bottom of the seasonal range, indicating limited inventory buffer.
• Current share of copper demand from AI data centersabout 1%The absolute demand share remains small, but AI has become an important narrative shaping expectations for future power, grid, and copper demand.
• LME copper price forecast2026 $13,400/t; 2027 $13,800/t; 2028 $13,700/tGoldman Sachs average price forecast, with 2027 slightly above the spot level on 2026-07-17.
• China apparent copper demandUp 2.7% YoY/YTD in January-May 2026The report uses this as one of its supply-demand tracking indicators.
• Chilean copper outputDown 9% YTD YoYIndicating continued disruptions in part of mine supply.
• Global scrap copper exportsDown 8% YTDDespite high copper prices, scrap exports still fell, reinforcing the view of tight scrap supply.
• US refined copper tariff expectationsMarket pricing implies about a 30% probability of a 15% tariff being implemented before January 2027Tariff expectations are driving US import pull and drawing supply away from ex-US markets.
• LME aluminum price forecast2026 $3,200/t; 2027 $2,700/t; 2028 $2,600/tGoldman Sachs expects aluminum prices to decline in 2027.

Impact & implications

For investment and trading implications, copper has a dual character in the short term: spot support coexisting with macro pressure. If low Chinese inventories, tight scrap supply, and US import pull persist, downside support for copper prices should remain strong; but if the Middle East situation escalates, concerns about inflation and rate hikes intensify, or AI-related risk assets continue to correct, copper may come under pressure alongside broader macro risk appetite. By contrast, the outlook for aluminum is weaker, with the report expecting aluminum prices to fall in 2027; zinc and nickel are more differentiated, driven by their own inventory, curve, and supply changes.

Risks

• Further escalation of conflict in the Middle East, pushing up inflation and rate-hike concerns.
• The Fed turning back to more hawkish pricing, weighing on commodity risk appetite.
• Further correction in AI-related chip stocks or data center thematic assets, weakening the copper demand narrative.
• If recent spot tightness in China was mainly caused by typhoon disruption and delayed arrivals, it may partially reverse later.
• If constraints on scrap substitution ease, additional demand for cathode copper may fall back.
• Changes in US tariff expectations may alter US import pull and the degree of tightness in ex-US markets.
• Speculative long positioning in copper remains elevated, so a weakening in macro sentiment could amplify drawdowns.

What to watch

• Whether visible Chinese copper cathode inventories remain at seasonal lows.
• Changes in LME cancelled warrants, the LME 3-month/12-month spread, and spot premiums/discounts.
• US copper import volumes and market-implied probabilities of refined copper tariffs.
• China's scrap copper VAT enforcement, scrap circulation, and secondary copper rod output.
• Whether China's copper import arbitrage reopens.
• The marginal contribution of the AI data center equity basket, DXY, and the China growth factor to copper price decomposition.
• The pace of recovery in cathode copper output after Chinese smelter maintenance ends.
• The impact of the Middle East situation and Fed rate expectations on overall risk appetite.