Key topics ahead of Fastmarkets international Copper Conference 2022

The key talking points that will be covered at this year's Copper Conference on September 22-23 in Barcelona, Spain

Copper stocks dry up

The deliverable copper stocks on the three major exchanges are roughly enough for two days of consumption.

International Copper Study Group (ICSG) data shows that the world consumed an average 2.2 million tonnes of refined copper on a monthly basis for the first six months 2022.

The Chicago Mercantile Exchange’s on-warrant copper stocks are now at their lowest level since April 2020, hitting 33,197 tonnes on Tuesday September 13. The Shanghai Futures Exchange’s copper stocks are at a similar level, with 37,477 tonnes as of September 9.

The London Metal Exchange’s (LME) on-warrant copper stocks dropped to slightly above 50,000 tonnes in early April, and have rebounded to over 75,000 tonnes recently.

Although on-warrant copper stock levels have recovered on the LME, concerns have arisen that the global copper market remains fundamentally tight, particularly because certain on-warrant inventories, like Russia-origin cathodes, are not marketable to everyone.

Russian copper supply still relevant

Discussion of whether Russian copper cathode is still being traded freely – being accepted for contractual delivery and exchange delivery – was spurred after Russian invasion of Ukraine started in late-February.

Broadly, there have been no direct sanctions toward the trade of Russian copper cathodes, and material continues to flow freely. However, due to import duties the LME has banned Russian copper cathodes from being placed on warrant in UK-listed warehouses; elsewhere the cathodes could remain warrantable.

According to ICSG, Russian exports of refined copper to European countries such as Germany and the Netherlands grew in the first six months of 2022, compared with the same period a year ago. In 2021, Russia produced 991,000 tonnes of refined copper, 44% of which was exported, according to ICSG.

Sources with access to Russian export data mentioned an estimated total of over 600,000 tonnes of refined copper exports for the first eight months this year. More than one-third of it was said to be sold to China, the sources told Fastmarkets.

Fastmarkets also understands that over the past few months some major buyers in Europe have not stopped receiving Russian copper cathodes under existing contract frameworks.

On the spot market, Fastmarkets has seen some Russian units being offered to a limited number of outlets at a premium of around $40-$70 per tonne lower than other brands in the past few months.

Power, logistics costs push Europe premiums to historic high

The re-appearance of Russian copper supply came while logistics chaos and the energy crisis pushed copper premiums to unprecedented levels in Europe.

To pass on rising costs, producer Aurubis imposed a $35 surcharge on top of its annual premium for the first time ever.

From October 2017 to October 2021, Fastmarkets’ copper premium cif Rotterdam remained rangebound at $35-55 per tonne. This stability has long been gone, with premiums reaching triple-digit levels.

In July and August, the premium was assessed at a historic high of $85-125 per tonne.

While these premiums rose and energy prices soared within the region, consumers became increasingly price sensitive with their margins being squeezed, driving more interest in discounted Russian units of copper compared with other imported brands.

This re-emergence has ultimately put pressure on physical premiums, with the copper grade A cathode premium, cif Rotterdam recently assessed at $50-100 per tonne on September 6.

In total, Europe consumed 2.02 million tonnes of refined copper in the first half 2022, up 3.8% from same period in 2021, according to ICSG.

Strain on Chinese commodity finance chain

With an economic slowdown, a power shortage, a property market crunch and an aluminium re-mortgage crisis in warehouses, many Chinese metals participants are finding it tougher to secure credit and keep their businesses going in 2022.

Maike, the giant commodity trader that once accounted for over one-fourth of China’s cathode imports, came under immense liquidity pressure due to overdue payments to its suppliers, Fastmarkets reported in August.

That sent shockwaves across the entire copper industry in China, with Maike’s owner admitting its financial stress to Bloomberg on the following day and presenting its plan to seek aid from the provincial government and state-owned banks.

Maike was hardly alone.

With financial taps not running, the fifth largest copper producer in China, Yanggu Xiangguang, was suspended for a few months.

The private smelter had to put partial stake on sale to the state-owned enterprise (SOE) in February, following a series of high-profile defaults in the country’s industrial heartland, Shandong province, in recent years.

The suspension of this private enterprise resulted in the diversion of concentrates, then a spike in spot treatment charges/refining charges (TC/RC), as well as a short-lived panic over counterparty risks in Cesco Chile.

SOE Xiamen C&D eventually stepped in to form a joint venture to revive procurement of concentrates and Xiangguang’s furnace.

Will China remain the top buyer of copper in the future?

This could be another wake-up call for copper sellers. For over two decades, China has been the top destination for the red metal to meet the infrastructure boom.

More and more suppliers have been prompted to rethink their sales strategy with spot demand not particularly robust for some months this year.

Fastmarkets’ benchmark Shanghai copper premium – an indicator of physical demand for imported copper and widely used for industry settlement – dropped to a record $5-15 per tonne in March, its lowest level since Fastmarkets started pricing the market in 2015.

It has since rebounded, with the arbitrage window opened from time to time. Fastmarkets assessed the copper grade A cathode premium, cif Shanghai at $75-92 per tonne on Wednesday September 14.

But it would be wrong to assume a dramatic decline in China’s demand for copper. In the first eight months this year, China’s unwrought copper imports rose 8% year on year to 3.9 million tonnes.

Copper is still seen as a strategic metal for the country to meet the goals of carbon neutrality and peak carbon emission.

Last year China auctioned off its base metals reserves at a discount to cool down the market, but sources with direct knowledge of the matter told Fastmarkets that the Chinese State Reserve Bureau’s plan to replenish national copper stocks had begun in the second half of 2022.

Exponential increase in copper scrap flow to China; profit margin outweighs political correctness

Underpinned by a strong rally in copper prices in April and May, more Chinese buyers are switching to cheaper alternatives like copper scrap – and it is making raising the price.

While local recycling is yet to catch up, for the first seven months of this year, the value of copper scrap imported to China rose to $8.6 billion, customs data showed. That is a dramatic increase from only $700 million for the same period in 2021.

The strong inflow was seen especially during months when the copper price rose and fabricators had to switch to cheaper raw materials instead of buying refined copper. Because only the highest-grade copper scrap is eligible for import into the country, which has denied the entry of scrap like insulated copper wire since 2019, it means there is a limited choice for copper scrap for importers to choose from.

Fastmarkets monthly assessment of No1 copper material, RCu-2A,1B (candy/berry), cif China, LME/Comex discount was 10-12 cents per lb on August 30.

Not surprisingly, No 1 copper raw material remained well sought-after and the discount was stretched thin for most of 2022. In terms of discount to exchange price, it was consistently at around 97%-96.5% of the LME copper price for the first half this year.

The motivation to buy cheaper copper raw material also outweighed political correctness – avoiding sourcing from the United States.

For the first six months the year, China has been the biggest importer of US copper scrap, receiving 166,534 tonnes, or one-third of the US’ total export. The country has surpassed Malaysia to take up the first spot.

Despite the hefty Chinese tariff on US-origin copper scrap that has been in place since the Donald Trump era, more Chinese buyers have managed to circumvent it with tolling licenses over time.

Lower grades, community conflicts, logistics woes remain valid

On the supply side, old problems remain and are still unfolding, including the natural depletion of some of the world’s biggest active deposits, rising tension among activists in mining communities and a lack of logistics infrastructure.

Through July this year, Chilean copper production reached 3.05 million tonnes, a 6.59% year-on-year decrease, according to Cochilco. Major copper mines like Escondida, Andina, and El Teniente all registered declines in output.

Community protests at Peru’s Las Bambas copper mine may not be fresh news, with on-and-off conflicts since its 2016 commencement, but the scale of this year’s two-month suspension has been significant.

While Las Bambas’ negotiations with different communities are still ongoing the giant mine, which accounts for 2% of global copper output, could not offer any 2022 production guidance at all, its Chinese-Australian operator, MMG, said.

And even in relatively peaceful regions of Peru, Southern Copper Corp’s Cuajone mine and ILO copper smelter were also interrupted for two months by the outbreak of protests.

In Africa, there were different problems. Mining copper can be carried out – with Kamoa Copper in the Democratic Republic of Congo (DRC) floating a record amount of copper in August – but shipping the copper out could be difficult for the mine and its peers.

A lack of truckers, limited options for routes and over-reliance on Durban port led to rising logistics costs and the disruption of copper exports from Africa, home to two major producers, DRC and Zambia.

Also among the delayed is the initial production at Russia’s Udokan copper mine – one of the world’s largest untapped copper deposits – which Fastmarkets understands has been postponed to third quarter of 2023 due to late delivery of major equipment and expertise. It was originally scheduled to commence in mid-2022.

Fastmarkets’ spot copper TC/RC index above annual benchmark for bulk of 2022
Despite these disruptions on supply side, spot demand for mined copper has been equally – if not more – wobbly so far this year.

Major disruptions include the mentioned suspension of China’s Xiangguang smelter and the recent Covid-led lockdown of Jiangxi’s Guixi – home to the world’s biggest copper smelting and refining complex – as well as the reallocation of units following a report that 294,179 tonnes of concentrates, worth over $710 million, were missing from Qinhuangdao last month.

These disruptions could account for the positive delta between Fastmarkets’ spot tracker of copper concentrate TC/RC and the annual benchmark, which was settled at $65 per tonne (6.5 cents per lb) for 2022 between Freeport and four Chinese copper smelters.

From March to August 2022, the monthly average reading of Fastmarkets’ copper concentrate TC/RC index has been above the benchmark, which was traditionally used as an indicator for global copper smelters and suppliers in long-term contracts.

In May, the monthly spot TC/RC reached $78.18 per tonne, the highest since January 2019.

Also notable: the copper concentrates counterparty spread between trader and smelter has widened to the unprecedented level of $16.53 per tonne for August and September, reflecting polarized views on TC trends from different parties.

Callum Perry contributed to this article

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