People were too bearish about copper demand in 2016, but the real situation proved to be slightly better than expected, a Shanghai-based trader said. This would support premiums in 2017 if the fundamentals improve, the same trader added.
“You had some analysts predicting a flat or 1% demand growth rate at the beginning of the year, but so far we have seen at least 3% growth rate due to robust demand from the state grid and even the most bearish air-conditioner sector is recovering,” an industry source said.
Chinese copper demand has been growing at a rate of around 4.5-5% so far this year, Jiangxi Copper executive director Wu Yuneng told Metal Bulletin in an interview this week.
Copper premiums on a cif Shanghai basis averaged $61.91 per tonne year-to-date, according to Metal Bulletin assessments.
Chinese consumers view the low $60s as the minimum level for average copper premiums for 2017, and their preferred annual settlements are around the mid-$60s.
Copper consumption in the first half of 2017 is expected to be strong due to the boom in the housing market in early 2016. However, a slowdown in the infrastructure sector in the second half of 2017 is expected to cause slower growth of copper demand in the period.
“Copper demand usually lags by half a year behind the booming sales of the housing market, so demand in the first half of next year will certainly be strong. We have some concerns over the second half, but we are not that worried,” one hedge fund manager told Metal Bulletin earlier.
“I am more optimistic about premiums for 2017 and for sure the premiums will change more frequently rather than [being] stuck at $40-50 for too long as we saw in 2016,” a smelter source said.
Spot premiums hovered at $40-55 between May and September this year, when the import arbitrage was unfavourable for Chinese traders. Low premiums in Shanghai and attractive incentives offered by LME-listed warehouses in Asia led to a huge outflow of copper in this period.
More copper deliveries to the LME?
The market expects that more tolling agreements will be approved by the Ministry of Commerce of the Government of China (Mofcom), which would encourage copper exports should premiums in China worsen.
“[There are] more smelters who have tolling agreements than in previous years, and if the premiums fell to the low $40s then smelters would export under tolling [licences] and sell to traders for delivery into the LME warehouses. But this would also put pressure on LME copper prices and arbitrage will reopen. It’s a cycle, so I would expect premiums to be up and down for next year,” a domestic trader said.
But several smelters who directly participated in the deliveries in 2016 said that total volumes might be lower in 2017 as they are more optimistic about spot premiums.
“We are not market makers and speculations on the prices are not our main source of profit. We only deliver out when the domestic premiums sink and thus exports could act as a good means of relieving the domestic surplus,” one Chinese smelter said.
Several other smelters reckoned that trader behaviour, such as transferring delivery destinations en-route under long-term contracts or stock movement out of the Shanghai-bonded zone, may still be possible in 2017.
Chinese exports of refined copper stood at 363,141 tonnes from January to October, with South Korea as the main destination receiving 127,642 tonnes in the ten-month period.
“I would say around half of that was done by traders, and this would continue if the arb [is] closed for longer [and] while incentives at attractive levels nearby lure [them to export],” a second smelter said.
“[Traders] are market makers and their behaviour would be triggered by different factors when deliveries seem irrational,” said the first smelter source.
This article was updated on Tuesday December 6 at 11:49am to correct the copper premium cif Shanghai average year-to-date to $61.91 per tonne.
In the first of our series of 2017 previews, copper premiums are expected to creep higher on average next year, but rates will fluctuate more than in 2016, market participants told Metal Bulletin.