European copper markets face unclear year: 2023 preview
Copper market participants have told Fastmarkets that European demand for the red metal in 2023 is “not all doom and gloom,” although the market will face problems
A recession is seen as being likely in Europe, sources said, citing inflation, energy prices and a series of other issues that could weaken the region’s economy. So with copper seen as a bellwether of economic strength, concerns about flagging consumer demand and the looming recession mean that European copper premiums are likely to be affected.
The European copper market is also relatively tight at present, with imports of Russian copper declining in the region, according to multiple trader sources. They said that this was exacerbated by a large volume of Russian copper already being stored in European warehouses, limiting the available space.
Annual contracts were set at record high levels which were 85% above those of last year but, with no clarity on demand in 2023, the question that market participants are asking is: where do European spot premiums go from here?
Lack of clarity on 2023 demand
For all base metals markets, there is a lack of clarity about likely consumption in the coming year. It is hard to see exactly how consumption will develop in 2023. Duncan Hobbs, head of research at UK-based commodity trader Concord Resources, foresaw two possible scenarios.
First, the European economy could flag and there would be a reduction in copper requirements. “A weakening economy reduces consumer spending,” Hobbs said. “Europe – and Germany in particular – are big exporters, so global economic headwinds could affect copper needs… If people are well covered on contracts, spot [prices for copper] could go down in this scenario.”
The second scenario describes a smaller downturn, indicating that the need for copper is higher than expected. “If, however, the downturn is not so large,” Hobbs said, “consumers may be tight [on supplies] and need to source more from [the spot market] later in the year, thus driving premiums up.”
Most market sources believe that there are likely to be problems affecting demand. One analyst source said that demand is likely to be at least somewhat poor in 2023, and that although the electrical sector and some parts of the industrial sector would be hit less dramatically, consumption among end-consumers and in construction is likely to be poor.
Traders told Fastmarkets in December 2022 that the challenging economic situation will definitely have some effect on the copper market in Europe in 2023. Despite the automotive sector being good, one trader added that “every other sector is already weakening” and that although the situation is not “doom and gloom” the market cannot be “fine.”
A second trader provided a slightly more optimistic outlook, agreeing that automotive demand is returning but adding that electronics too was “booming,” though conceding that construction was a “disaster.”
The same trader also said that “with no new dramas, things should be okay,” adding that he is “relatively optimistic” about 2023.
Other than construction, the same source believes that demand will be back to pre-Covid levels, concluding that “quantities will not be weaker” in 2023 than in 2022.
Supply concerns loom for the year ahead
A number of sources also raised concerns about supply. Hobbs said that, at present, the market is “quite tight.”
The first trader said that the decrease in Russian copper imports into Europe is “more than made up for by lost demand.” He noted that Europe will be losing huge volumes from its traditional supply sources due to decreased demand for Russian material in light of the trading sanctions on the country after its invasion of Ukraine.
The second trader source agreed, saying that far less Russian copper will make it onto the European market in 2023 compared with previous years. A third traded added that Russian material was already less often accepted toward the end of 2022.
Another factor potentially limiting supply is that London Metal Exchange warehouses have entered 2023 with the lowest year-opening stock levels since 1997. The LME is the “market of last resort” and in previous years consumers could always turn to LME warehouses to get metal if they were in need, but this will be harder this year.
The warehouse issue is made more precarious because large amounts of the copper in European warehouses is of Russian origin, according to multiple copper and warrant trader sources. Off-warrant copper stock is down by 36% year on year, according to the latest data from the LME.
The supply concerns, along with a number of other factors such as increasing freight and production costs, have dramatically increased the annual copper premium levels, which Fastmarkets understands are being agreed around $230 per tonne.
Aurubis’ and Codelco’s benchmark annual numbers were both more than 80% higher for 2023 than last year. Fastmarkets has also been told that traders’ annual figures have been agreed close to those numbers.
“The good demand for refined copper is expected to continue in 2023 and, in combination with the very low inventory situation on all three exchanges, this is indicating a continuously tight market for 2023,” Michael Hellemann Soerensen, senior vice president, commercial, at Aurubis, said on October 13, while discussing the increased premium.
Soerensen added that the rise was due to “sharply increasing production costs and very high freight charges, in combination with the expected good demand for refined copper and a tight market in 2023.”
Tight supply to affect spot market
The effects of a tight supply situation in Europe, a lack of clarity on demand, and record high annual contract prices are likely to have consequences for the spot market.
Initially, after Aurubis’ and Codelco’s numbers were first heard in the market, participants said that some might be willing to leave more of their supply needs to the spot market. With annual prices high, and a potential recession on the horizon, numerous market participants told Fastmarkets that some who would usually rely on annual deals were leaving more material to the spot market.
The argument was that, were demand to fall off by as much as some thought it might, spot prices could then fall well below the annual contract levels. In this situation, consumers would not be able to recoup premiums if they needed to sell-on material they did not use.
Beyond this, in theory, if spot levels did fall, consumers could save money in 2023 by buying a higher than normal percentage of their material on spot terms.
Ultimately, however, consumers appear to have broadly accepted the annual prices. “No one wants to be left short,” the second trader said. “Customers aren’t really thinking about spot [as a replacement to annual deals],” he continued, adding that - despite discussions around an increased focus on spot trading - these discussions had quietened before the year-end.
It is not worth the risk to save “a few dollars,” the second traded added. The first trader source said that relying on spot deals led to more time constraints and less consistency than in annual deals, meaning that fears of increased reliance on spot trading was unlikely to be realized.
Sources did note, however, that the balance of annual agreements compared with spot trading was likely to shift slightly toward spot, if only because of consumers ordering reduced volumes due to demand concerns.
In the first pricing session of 2023, on January 10, Fastmarkets assessed the copper grade A cathode premium, delivered Germany, at $160-190 per tonne, up from $140-160 per tonne in the previous pricing session. The move upward was due to market participants already commenting on the effects of new annual deals.
Fastmarkets assessed the copper grade A cathode premium, cif Leghorn, at $150-170 per tonne on the same day. But the premium could be as high as $200 per tonne because “there is a lot of confusion in the market at present.”
And Fastmarkets assessed the copper grade A cathode premium, cif Rotterdam, at $50-100 per tonne on January 10, unchanged since September 6.
One trader source noted that, because annual deals increased so much going into 2023, many market participants were making sure that they are well supplied for the first quarter, in the hope that they would not need to resort to the spot market.
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