ASIA COPPER WEEK 2017: Seven things we learned in Shanghai

Close to 2,000 copper and other base metals participants descended on Shanghai for the annual Asia Copper Week from Tuesday November 28 to December 1, an event at which participants traditionally gather to discuss long-term contracts for both copper cathodes and concentrates as well as to exchange views on the market for the year ahead.

After several years of buyers having the upper hand in the copper market, the scales have gradually tipped in favor of sellers for 2018, especially in regard to copper concentrates.

Metal Bulletin’s editorial team from Shanghai, London and Singapore provides a wrap of the seven key things we learned at the event.

Cathode premiums: More optimistic signs for 2018
When Codelco offered cif Shanghai copper premiums at $75 per tonne for 2018 long-term contracts on November 21, market opinion was divided even though the number fell within expectations. A spot average below next year’s benchmark made buyers hesitate whether to go “long” or “short” for their purchasing strategies.

One week after the offer, more optimistic signs were seen in the market, especially for electrolytically refined (ER) cathodes, which had better liquidity in 2017 and traded at higher premiums compared with solvent extraction-electrowinning (SX-EW) cathode.

“Everyone is asking for ER packages for 2018; the price gap between ER and SX-EW cathode will widen further,” a China-based metals trader.

The typical price differential between ER and SX-EW cathode is around $5-10 per tonne, while a wider range of $10-15 per tonne had been prevalent for several months this year, according to Metal Bulletin historical data.

Metal Bulletin learned that offers for mainstream ER cathode brands from trading houses are in a range of $72-75 per tonne, with very few offers for top Chilean brands being heard. This was because market participants were unsure about how much tonnage they could secure from Codelco and Enami due to lower exports of cathodes expected from these producers in 2018, while their smelters undergo long periods of maintenance to comply with new environmental regulations.

The buyer’s concerns about securing the supply of top Chilean brands of copper cathode for next year were further supported by news that, during this year’s Asia Copper Week, Chile’s state-owned copper miner Codelco had achieved its most successful campaign in recent years to sell copper cathodes to Asian customers.

Codelco noted that around 50% of its production volume for next year had already been placed as of November 30. This compares with around 20% of cathode production sold during Asia Copper Week last year, Metal Bulletin understands.

The campaign “is going very well – customers are accepting our [premium] offers and booking volume right away,” Codelco’s senior commercial vice president Rodrigo Toro said on Thursday November 30. “[This is] not only in China but in Taiwan, where it has been easier [to sell] than in the past five years,” Toro said last week.

In the rest of Asia, Codelco increased its 2018 copper cathode premium for its customers in Taiwan, Japan and South Korea by 3% year on year to $70 per tonne, while the state-owned miner offered a premium of $75 per tonne to its customers in Southeast Asian countries including Thailand, Vietnam and Malaysia.

Codelco sells around 35% of its cathode production to China, 15% to the rest of Asia, 15% to Europe, 25% to the United States and 10% to South America, Metal Bulletin understands.

In addition, combined cargoes of SX-EW and ER cathode offered by traders were heard to be trading at around the high $60s to $70 per tonne.

Cathode prices: Correction widely expected, but bulls see $8,000 per tonne 
Copper prices on the London Metal Exchange have risen over 20% so far this year, benefiting from surprisingly firm Chinese demand, the recovery of global economies such as the United States and several European nations, as well as the expectation of increased red metal consumption from the electric vehicle sector.

A number of market participants expressed the opinion that the rise in prices was overdone and predicted less volatility in the year to come.

“The range between the highs and lows of 2018 will be narrower compared with this year,” a senior brokerage manager said.

A correction in copper prices is also widely expected by the market, especially during the traditionally low-consumption season in China during the winter months, Chinese New Year celebrations and until the second quarter.

Yet some in the market remain confident that red metal prices still have room to grow.

He Jinbi, chairman and chief executive officer (CEO) of Maike Group, projects that the copper price will reach $7,300 per tonne in the next six months and even exceed $8,000 per tonne in 2018.

In November last year, Maike had predicted that copper prices would reach $6,300 per tonne in 2017. Prices surpassed the $6,300-per-tonne level in July of this year and are currently trading at around $6,800 per tonne.

Concentrates TC/RCs: United on supply-demand balance outlook, divided on processing fees
Whether at Metal Bulletin’s 13th Asia Copper Conference on November 28-30 or at one-to-one meetings between smelters and miners during the week, the demand-supply picture painted by both sides showed little difference, with the two sides agreeing on a balanced market for 2018.

Yet, when discussing the expectations for treatment and refining charges (TC/RCs) the two groups took more polarizing stances.

Miners were said to be looking for TC/RCs in the $70s per tonne, while smelters had been pushing for a rollover of, or at least, a number close to this year’s level of $92.50 per tonne and 9.25 cents per lb.

Tongling Nonferrous Metals Group, which is taking the lead for smelters in the 2018 TC/RCs negotiations, was one such smelter that was pushing for a benchmark around this year’s level amid potential smelting disruptions, deputy general manager James Wang told Metal Bulletin last week.

“We see a concentrates market next year quite similar to this year – no big surplus, no big deficit – so the [TC/RCs] benchmark should stay around the same level too,” Wang said in an interview on November 28.

On the mining side, Tongling predicts a net global production increase of between 750,000 and 800,000 tonnes of copper in concentrates in 2018, including 100,000 tonnes in China – 15,000 tonnes for Tongling – 30,000 tonnes in Australia and growth at Chile’s Escondida mine.

While on the smelting side, Tongling sees further expansion in China and Iran next year and globally a net increase in requirements of around 600,000-620,000 tonnes of copper in concentrates.

“So we are expecting a surplus of 100,000-200,000 tonnes, which is not a big number for the concentrates market,” Wang said.

Yet, Wang warned of the greater risk of disruptions on the smelting side compared with the mining side next year, especially for smelters in China, due to potential environmental issues and a lack of credit availability amid higher interest rates.

Meanwhile, Codelco views annual TC/RCs below $85/8.5 cents for 2018 as “acceptable” given the deficit seen in the second half of the year, the company’s commercial vice president said.

Support for TC/RCs to settle in the above range came from Standard Chartered, who predicted a range of $80-85/8-8.5 cents as a level at which is profitable for “almost all smelting capacity”.

No agreements were reached between smelters and miners during the one-week negotiations but the price differential is narrowing.

Negotiations are expected to be concluded by no earlier than late December.

Finally, some participants stated that the global copper concentrates market is unlikely to experience the same tightened conditions in 2018 that have afflicted the zinc and lead markets this year due the high levels of copper concentrates available.

Mining and smelting: Cost and environment
After suffering a downturn for a number of years, both miners and smelters showed greater consideration for costs at this year’s gathering. More importantly, miners in both Chile and smelters in China are facing more pressure from stricter environmental regulations.

Faced with rising costs and environmental pressure, copper mines need higher prices around or above $7,500 per tonne to justify new investments in production and to keep up with growing demand, executives from key mining companies said at the conference.

Production costs are rising due to stricter environmental regulation, water shortages, higher energy bills and lower prices for byproducts such as molybdenum, Nelson Pizarro, chief executive officer of Chile’s state-owned miner Codelco, said.

Miners and smelters need to reach an agreement on profitable treatment and refining charges (TC/RCs), which will benefit the entire copper industry for the long term, Wu Yuneng, president of Jiangxi Copper said.

Market participants with rich knowledge of the market believed that smelters cost could be in the range of a TC around $50-70 per tonne.

“[TC/RCs of around] $50 per tonne or 5 cents [per lb], or in some cases $60-80 per tonne or 6-8 cents per lb, are required to sustainably operate a new smelter and that’s why increasing copper smelting capacity is not easy,” JX Nippon Mining & Metals Corp chief executive officer Shigeru Oi said at Metal Bulletin’s 13th Asia Copper Conference.

Wu mentioned that Chinese authorities have tightened environmental regulations in recent months, with companies that are unable to meet these requirements facing the possibility of being shut down. This is already happening in the Chinese provinces of Shandong and Hebei, as well as in the cities of Beijing and Tianjin.

In addition, higher emission costs for smelting slag will also be introduced in China from the beginning of next year, with the cost estimated at 25 yuan ($3.77) per tonne, Wu said.

In the meantime, James Wang from Tongling Nonferrous also told Metal Bulletin that copper smelters, alongside other industries in China such as aluminium producers, may have to reduce smelting capacity by 30% during the winter months if the government’s pollution index target is not met, which would not only reduce existing output but also delay smelting expansion plans.

While Chinese smelters are up against more environmental pressure, miners and smelters in Chile are also facing stricter environmental policies.

Smelting capacity at Codelco’s Chuquicamata will fall by 50,000 tonnes in 2018 as it closes down one of the furnaces to undergo an upgrade to comply with environmental policy.

Meanwhile, the One Belt One Road Initiative (OBOR) project, launched by China, continues to be a hot topic at Asia Copper Week and will encourage commodities demand and economic growth in industries and countries along the route.

Scrap: China’s plan to adopt strict waste thresholds would have a massive impact
China intends to adopt thresholds of 1% for impurities allowed in non-ferrous scrap imports to China and 0.5% for ferrous scrap imports, it announced to the World Trade Organization (WTO) on November 17.

If implemented, this could have massive and immediate effects, Michael Lion, president of Lion Consulting Asia Ltd, warned.

The changes would cause dislocation and disruption in copper flows because scrap supply generated by mature economies would have to find a new home while Chinese consumers look for alternative options, including importing more concentrates and refined copper, Lion explained.

Before this, China has made a series of policy changes this year under President Xi Jinping, including significant reductions in the categories and volumes of waste imports.

From January 2018, trading firms are no longer granted import quotas because all scrap business must occur between overseas sellers and domestic end-users directly. In addition, the import of category 7 copper scrap will be reduced in 2018 and banned from 2019.

Credit: continues to tighten
The lending environment for metals players kept has been being squeezed since 2014, after Qingdao fraud alerted banks about risks in metals business.

Though some players left the market because of lending issues and some companies diversified from metals to other areas, the leverage environment will continue to be tough for the market in 2018.

“Everything now looks good besides credit, if some company is reducing their long-term bookings for 2018, 90% of it’s because of credit,” said one Shanghai trader.

The Chinese economy, including the metals in
ustry, is highly focused on deleveraging
going into next year, which should see more capacity cuts among unprofitable smelters, senior delegates at the conference said.

“Deleveraging is a trend for next year – we are going to have a winding path but the direction is very clear,” Xiaobing Li, general manager of China Ordins Group Co Ltd, said on Wednesday November 29.

The reduction of company debts will continue to remove “unreasonable and inefficient capacities” in the ferrous market and, to a lesser extent, the non-ferrous sector, Li told delegates.

“Deleveraging is one of the biggest challenges that we are facing. Chinese companies are now putting more attention on value rather than price alone and the credit situation is also better. But deleveraging cannot be done overnight,” Yuan Huang, chief executive officer (CEO) of Greater China, said at the conference.

Financing copper remains difficult in China due to the depreciation of the yuan against the dollar and tighter regulations in the country, according to market experts.

Comparing the current environment against five years ago when copper financing was at its height, “in 2012-2013, the financing need was high and China’s copper inventories reached a peak of 900,000 tonnes – and today it’s not at that level,” Xiao Fu, head of commodity markets strategy at the Bank of China International Global Commodities said.

New products
The market awaits the shipment of the first “green copper” of “fengshui copper” by Codelco in the next couple of months.

Japan continues to be in the forefront of innovative technology and is using secondary raw materials such as e-waste or e-scrap to produce copper, said a JX Nippon Mining and Metals executive.

Meanwhile, the market was abuzz with discussions of cif Shanghai copper premium (CUP) futures contracts launched by the Chicago Mercantile Exchange on November 20, which will use Metal Bulletin’s cif Shanghai copper premium monthly average for settlement.

“I echo that the CME premiums contracts have been quite revolutionary and very successful,” LME ceo Matt Chamberlain said, adding “[the premiums] are over the LME benchmark [price, which] is fantastic from our perspective”.

“[It’s a] great example where exchange innovation can be helpful for everyone,” he said.

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