“I am not as optimistic as smelters in terms of spot premiums next year. I barely see any bright spot in Chinese copper demand. Both in terms of financing and consumption – demand is not looking particularly great,” Li told Fastmarkets during an interview on Friday November 9.

“While there may be premium hikes when the arbitrage window is open, it’s not going to be sustainable,” he added.

China-focused copper trader Arc Resources trades approximately 500,000 tonnes of copper cathode each year, of which more than 80% of deals are made on a spot basis, Li told Fastmarkets.

The company considers itself to be China’s third-largest copper cathode trader in terms of volume, behind Maike and Jiangxi Copper’s trading arm, according to Li, who oversees the company’s Chinese business.

Copper premiums in China have witnessed significant volatility since the start of the second half of this year, with the spot cif Shanghai premium jumping to a two-and-a-half-year high of $100-115 per tonne in September amid an open arbitrage window. The premium currently resides at $78-90 per tonne, according to Fastmarkets’ latest assessment.

“On average, this year’s premiums have been staying at a relatively high level. Both cif and in-warehouse premiums peaked in September and slid in October amidst a closed arbitrage window following the Chinese National Day holidays (October 1-5),” said Li.

In September, an open import arbitrage window had driven Chinese imports of unwrought copper and copper products up by 21% year on year to 521,000 tonnes – the highest since March 2016.

Since then, importers have stood to lose approximately 1,000-1,300 yuan ($144-187) per tonne of copper cathode into China, Li estimated.

The majority of imported copper cathode traded by Arc Resources is eventually delivered to end users in China, with the country’s largest copper rod producer, AMER, among its key clients. Arc Resources also purchases foreign cathode to sell to copper tube and wire makers in China.

“Downstream clients told us the orders they have received for next year are more or less the same as 2018, while copper demand from [China’s] electricity, auto and real estate sectors may not grow next year, meaning the overall demand [in terms of consumption] will be so-so,” Li said.

In addition to cathode procurement, Arc Resources also provides access to credit insurance for its clients, both in the Chinese and European markets.

Arc Resources sells imported copper cathode to domestic clients on deferred payment terms, for instance on a 90-day basis. As the repayment will be made in the future, Arc Resources’ end-user clients can obtain a short-term loan from insurance companies without using copper cathode as collateral, Li said.

Due to the process involving the genuine clearance of copper cathode imports, it is not regarded as speculative copper financing – something which is discouraged by the Chinese government.

On the other hand, there are other speculative means of copper financing, including copper cathode financing products that make profit out of interest arbitrage, as well as those copper investments by property developers that are seen as linked to shadow banking, which is a lot less active compared to a few years ago, Li said. 

“Copper financing demand will not be burgeoning next year as the national policy [to tighten credit lines for copper financing] is unlikely to reverse.” Li added.

The outlook of softer spot premiums in China for next year contrasts with the 17% increase in the 2019 copper premium that Chilean producer Codelco had offered to its Chinese customers in late September.

Codelco offered its Chinese customers' copper cathode supply in 2019 at a premium of $88 per tonne, an increase of $13 per tonne from the prior year. The Chilean producer has yet to discuss details of the contract with its clients, though is likely to do so at this week’s Asia Copper Week in Shanghai.