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The US Midwest delivered copper premium inched down to 5.0-5.2 cents per lb this week and is seen holding around these multi-year lows or even slipping further.
At a seasonally quiet time of year and after the volatility of recent months, the general consensus is that premiums could fall below 5.0 cents this year if demand trends persist and if demand from Chinese and European customers fails to draw material away from the USA.
“It’s pretty bleak right now. People are walking on eggshells,” a trader told Metal Bulletin.
Traders are willing to lock in lower premiums for the first and second quarters of 2017 because they are concerned about demand in the second half of the year.
“The only fluctuation is on the supply side – we see no issue on the demand side,” a trader said. “That’s the determining factor if [the premium] holds at 5 cents or dips below to 4 cents.”
If the market stays below 5.0 cents, which is near the break-even point when factoring in logistics and shipping costs, “you’re going to deplete the competition right as supply gets over demand”, the trader said.
For now, traders and suppliers are gauging foreign markets for hints on the how the USA will perform in 2017. Early signs are worrying – Chilean producer Codelco cut its copper cathode premium to Chinese customers by 27% to $72 per tonne for this year.
Also underlining the weakness of demand is unused inventory that has returned to warehouses, which is partly a book-squaring exercise for the end of last year.
The massive increase in warehouse stocks – since the start of December, LME inventories have jumped to about 306,000 tonnes – also shows the market is amply supplied.
In the USA, too, CME stocks have risen, with the New Orleans total up by more than 20,000 tonnes since the end of November.
But the biggest issue over the past month has been the gap in perception between producers and consumers about the state of the physical market going into 2017.
Optimism picked up coming into mating season, with futures prices hitting a fresh yearly high amid talk of a $1 trillion US infrastructure plan by President-elect Donald Trump.
But the rally petered out – physical demand did not match the mood from bullish investors.
In light of this, contractual deals for 2017 supply are expected to cover only 60-65% of demand compared with 80-85% last year. Fewer long-term contracts means the spot market is likely to become more volatile this year, with consumers setting themselves up to respond more quickly to near-term changes in demand.
Small and medium-sized traders are most at risk from these conditions. Lacking the capital of larger firms, they cannot influence the market to the same extent as larger traders that can more easily shift tonnage from one region to another.
“We as small traders may have some spot opportunities and in my case I will focus on switches and swaps when available,” a supplier told Metal Bulletin. “We should look at warehouse drawdowns to see what the ‘big’ traders are doing.”
Another round of Chinese stimulus or concrete progress in Trump’s pledge to overhaul US infrastructure could boost demand for the red metal and create opportunities for traders to fill in the gaps for hungry customers.
But if premiums stay at these levels or go lower, the number of grinches won’t subside once the holiday bells stop ringing.