(Bloomberg) -- Copper surged to its highest-ever level, extending a months-long rally driven by financial investors who’ve piled into the market in anticipation of deepening supply shortages.

Futures on the London Metal Exchange jumped more than 4%, taking copper past $11,000 a ton for the first time, before paring some gains in afternoon trading. 

Banks, miners and investment funds have been touting copper’s bright long-term prospects for months, and a flood of investment into the market over the past few weeks has piled pressure on bearish traders who’ve taken a more cautious stance owing to weak spot demand, particularly in China. 

Several developments in 2024 have emboldened copper bulls and drawn in a rising tide of speculative money. Tight supply of copper ore fueled talk of output cuts by smelters, and investors are betting that surging usage in fast-growing sectors including EVs, renewable energy and artificial intelligence will offset the drag from traditional sectors like construction. 

Prices started to take off in early April, and last week the rally went into overdrive as a short squeeze on the New York futures market triggered a global rush to secure the metal.  

“That has taken prices to another level and it’s very difficult to call a top in this environment,” Craig Lang, principal analyst at researcher CRU Group, said by phone from Singapore. “Commodities markets do tend to overshoot.”

Read More: Copper Short Squeeze in New York Is Rocking Metals Markets 

Investors, traders and mining executives have warned for years that the world faced a critical shortfall of copper amid ballooning demand in green industries. Jeff Currie, commodities veteran and the chief strategy officer of the energy pathways team at Carlyle Group Inc., said last week that copper was the best long trade he has ever seen.

However, many participants in the physical trade have warned that copper prices were running ahead of reality. Demand remains relatively tepid — especially in top buyer China, where inventory levels remain high and suppliers of copper wires and bars have been cutting output. Chinese demand is so subdued that smelters have been racing to export copper as prices in New York and London have shot ahead of prevailing prices in the domestic market.

Read More: China Copper Gauge at Zero Offers Stark Warning to Metals Bulls

But the disconnect has continued to grow as investors flocked to western exchanges and bearish traders rushed to buy back short positions. 

Copper’s rapid ascent to $11,000 has also brought significant volumes of bullish options into the money, in a trend that could add fuel to the rally as dealers who’ve sold the contracts move to cover their exposure by buying futures. 

LME copper was up 2.2% to $10,904 a ton by 3:15 p.m. in London, after earlier hitting an all-time peak of $11,104.50 a ton. 

Prices have gained more than a quarter since the start of this year, spearheading across-the-board gains for major industrial metals. Like copper, gold has also rallied to a record, with both metals getting support from optimism that the US Federal Reserve will start cutting interest rates this year.

Read more: The Copper Market Grapples With a Crucial Question

Diverted Metal

A series of setbacks at major copper mines are fueling fears that a much-anticipated production shortfall will arrive earlier than expected. Smelter treatment fees — a gauge of tightness in the ore market — plunged below zero in April, raising the prospect that plants will be forced to cut production to stem losses. 

And the short squeeze on the Comex exchange in New York drove prices there to an unprecedented premium over the LME. That triggered a rush to reroute copper to the US, meaning less metal available elsewhere.

“The Comex short squeeze is rediverting copper to the US and tightening supplies in other regions,” Gong Ming, an analyst with Jinrui Futures Co., said by phone. “The Chinese market is expected to see inventories withdrawal soon with exports rising.”

--With assistance from Liezel Hill, Jason Scott and Guillermo Molero.

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