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Later this month, the world’s largest copper producers, consumers and traders will meet in London to hammer out supply deals for next year, and as always, they will have different ideas about the physical premiums that should be attached to those contracts.
As they ask for stronger premiums, producers will point to the low stocks in London Metal Exchange warehouses, expectations of further infrastructure spending in China, and the mine-side supply slippage that has plagued the industry in recent years.
Chinese consumers will offer a simple data-driven counterargument: miners will produce more next year, and proportionally, Chinese buyers in particular will need less.
They will also tell producers that the mountains of copper stored in Shanghai warehouses are, in part, a reflection of the fact that Chinese buyers over-booked on contracts last year, and they will not be so aggressive this time around, not least because copper prices, at $8,300 per tonne, are around 20% higher than they were a year ago.
A straw poll conducted by Metal Bulletin ahead of the annual talks suggests that the buyers’ arguments will prove the more persuasive, and the benchmark Chinese premium set by Codelco should fall from the $110 level next year.
As an analyst in Hong Kong told Metal Bulletin, Codelco’s 2012 European premium of $90 per tonne already seems “a bit punchy” for the Chinese market, where cif Shanghai premiums are currently running at $50 per tonne.
He expects that the volumes that buyers in China book on annual contracts could fall by as much as 50,000 tpm as they take their chances on the spot market.
That, incidentally, is what European buyers decided to do this year. As a result, their sporadic hand-to-mouth buying has helped to push spot premiums in Rotterdam up to around $100 per tonne, up from $50 per tonne at the start of the year.
The indications are that consumers in Europe will continue to leave themselves exposed to high premiums in the spot market next year as they pursue a just-in-time approach.
They will seek to book only minimal volumes on long-term contracts, covering only their weak base-case expectations for demand.
As mating season begins, the market expects Chinese consumers to follow a similar tack, and as a result we may see a repeat of what happened to European premiums this year in the Asian market in 2013: benchmark premiums will fall, and spot premiums will rise.
Mark Burton mburton@metalbulletin.com Twitter: @mburtonmb