The South American gathering is traditionally characterized by strong attendance by miners, due in part to its proximity to the largest copper mines in the world. As a result, delegates will have a keen focus on factors that could affect the upstream copper supply chain.

The rebound in the outright copper price in the first quarter, as well as the recent big slide in copper concentrates treatment and refining charges (TC/RCs), has put miners in a relatively easy position in the market at this time.

But there are still indicators pointing to potential headwinds. An abundance of the copper cathodes has been signaled by recent massive inflows of copper stock into warehouses. Also, the physical copper premium for China, typically a demand harbinger, is currently at its lowest level in the past two years.

Copper price rebounds in Q1; to stay supported in Q2
First, let’s take a look at the copper price. After a notable decline in 2018, the London Metal Exchange copper price has rebounded so far this year.

Over the course of 2018, the red metal price slid 22% amid a challenging macro-backdrop. The three-month copper price closed the year at $5,912 per tonne, compared with $7,216.5 per tonne at the start of 2018.

In the first quarter of 2019, the LME copper price has ranged $5,775 and $6,520.50 per tonne, representing a soft rebound from late last year. In the same period of 2018, the red metal price was moving in a low-high range of $6,623-7,189 per tonne.

Fastmarkets MB base metals analyst Andy Cole has forecast the second-quarter copper price to rise slightly to $6,500 per tonne, supported by tightened second-quarter fundamentals.

“Copper’s fundamental indicators were somewhat weak in the first quarter, but we expect a tightening in the second quarter driven by a revival in global growth, especially in China after the easing on the fiscal monetary policy front, as well as a seasonal pick-up in downstream demand,” Cole said.

Cole expects the price to eventually climb to $6,750 per tonne by the fourth quarter, still showing a relatively narrow price fluctuation.

In contrast to the diminishing volatility in copper’s outright price, copper spreads have swung wildly in recent times to attract more bets from metals funds.

The cash/three-month spread on the LME moved from a $30 per tonne backwardation on November 30 last year to a $54 contango on December 14. It then swung to a $62 backwardation on March 1 and recently returned to contango. As of Friday April 5, the spread is sitting at a small contango of $14.50 per tonne following a massive delivery on Thursday.

While the outright price remains constrained by global growth prospects that have been damaged by trade wars, spread swings provide a solid platform on which funds can trade.

Increasing bets on copper spreads also mean more attention is being paid to movements of on-exchange stock.

Copper stocks continue to yo-yo this year
Turning to the supply side, huge tonnages taken off warrant and then rewarranted in the LME warehouse network have been a common phenomenon over the past few years and this has continued into this quarter.

The latest massive inflow was on April 4 when 30,000 tonnes of material flowed into LME-registered warehouses across Asia and Europe.

There was similar inflow in mid-March when some 35,000 tonnes of material was delivered into the exchange’s warehouses on March 14, doubling the on-warrant inventory in just one day.

While LME prices typically shrug off massive deliveries because they rarely represent the fundamentals any more, it at least signals the availability of physical copper in the market.

Fastmarkets’ grade A copper cathode premium in Rotterdam has stayed largely flat in a wide range of $38-50 per tonne in the past three months, according to Fastmarkets historical data, reflective of ample availability of cathodes across Europe. The range widened from $40-50 per tonne in January and had been as narrow as $45-50 in October 2018.

Meanwhile in China, significant stock movements have also been a focus of the market. Copper stocks in Shanghai-bonded warehouses reached at a 20-month high at the end of March on limited procuring interest. Fastmarkets assessed Shanghai-bonded copper stock at 563,000-567,000 tonnes as of end of March, up by over a fifth in just one month.

Abundant supply of standard quality cathode has led those holding metal to offer at lower levels. Fastmarkets’ in-warehouse Shanghai copper premium dropped to $42-65 per tonne on April 5 from $63-80 per tonne at the beginning of February.

Softer Shanghai copper premiums - both in-warehouse and cif – are viewed by market participants as a signal of weaker Chinese copper demand, which may weigh on the copper price because Chinese consumption makes up over half of global refined copper demand.

Fastmarkets' benchmark cif Shanghai copper ER and SX-EW premiums stand at $42-68 per tonne as of April 4, their lowest level since April 2017.

Another factor pushing premiums lower is a closed import window, which discourages trading interest. The copper London-Shanghai arbitrage has been in negative territory for the first three months of the year.

As of Friday April 4, copper importers stood to lose $85.80 per tonne by bringing copper cathode into China.

China outlook
Yet Chinese copper demand is expected to be stable into the second quarter with market confidence boosted by a pick-up in Chinese manufacturing data.

China’s official purchasing managers' index reading, a gauge of big enterprise activity, increased to 50.5 from a three-year low of 49.2 in February; while the Caixin’s PMI, more reflective of small and medium enterprises, also rose to above 50, the line differentiating growth and slowdown.

In particular, air conditioner production - which represents 14% of Chinese copper demand - looks well-supported. Growth in air conditioner unit production in January-February stood at 6% year on year, highlighting a solid foundation for the demand of red metal from this sector.

“There should be a seasonal pick-up in downstream demand,” Fastmarkets’ Cole said. “We may see a drawdown in exchange inventories, a tightening of spreads and a rebound in physical premiums.”