1．Rising Natural Gas Prices Further Squeeze Profits of Copper Rod Enterprises

  The war between Russia and Ukraine officially started, and the spot price of TTF natural gas on the European Energy Exchange rose about 10% on February 23. US natural gas futures prices also rose more than 6%.

The domestic natural gas prices are driven up by the overseas prices. The data of Shanghai Petroleum and Natural Gas Exchange showed that the Chinese LNG ex-factory price was 8,314 yuan/mt as of February 23, up 140% on the year, and an increase of 67% on the month.

Before the Chinese New Year, the natural gas prices in China was just slightly higher than that in December 2021.

However, due to the rising prices of natural gas recently, the upstream gas source units have limited the supply, and some regions saw large supply gap of natural gas. In order to ensure the normal gas consumption of residential users, the gas supply for industrial enterprises is likely to be urgently shut down.

According to our SMM survey, the copper cathode rod enterprises in some regions have received the gas restriction notice, but the gas restriction has not been implemented for the time being, which has not affected the actual production.

The conversion cost of copper cathode rod is about 430 yuan/mt, in which the cost for energy accounts for about 52.2%, including hydropower, natural gas, etc., and the natural gas expenditure accounts for more than 75% of the total energy cost.

The cost of auxiliary materials takes up 18.3%, and the depreciation costs are also high. The costs of manpower, maintenance and other costs account for 9.1%, 4.7%, and 2.6% respectively.

It takes more than 40 cubic meters of natural gas to produce one tonne of copper cathode rods. Hence the surge of natural gas prices will impact the copper cathode rod enterprises significantly.

The current supply of copper cathode rod is far higher than the demand. Although the producers have raised the conversion margins by 20-50% for the long-term orders in 2022, their profits will continue to be squeezed if the natural gas prices rises again.

The conversion margins across the country are standing low due to the poor downstream consumption and low premiums of copper cathode. The profits of the copper cathode rod enterprises in some regions were around the break-even point.

The average conversion margin of 8mm power rod in east China is 575 yuan/mt (including premiums&discounts) and 585 yuan/mt (excluding premiums&discounts), and the profit is only around 100 yuan/mt.

The average conversion margin of 8mm power rod in south China is 340 yuan/mt (including premiums&discounts) and 500 yuan/mt (excluding premiums&discounts), and the profit is lower than 100 yuan/mt.

 

 

 

 

 

2、Zijin Announced Expansion Plan of Copper Joint Venture in Congo

Zijin Mining, China, announced on Wednesday that its joint venture copper mine project in the Democratic Republic of Congo (DRC) will spend $50 million to upgrade and improve its metal production capacity and output.

Zijin said in a document that as a part of the plan, Ivanhoe Mine of Canada was its main partner, each holding 39.6% shares. The Kamoa-Kakula project will increase the capacity of its beneficiation plants by about one-fifth.

Zijin also indicated that its “de-bottlenecking plan” will increase the comprehensive design and production capacity of the beneficiation plants from 7.6 million mt to 9.2 million mt per year.

And the plan will also increase the annual output of copper in these smelters from the previously estimated 400,000 mt to over 450,000 mt, making Kamoa-Kakula the fourth largest copper producer in the world.

Zijin added that the “de-bottlenecking plan” will take about 12 months to complete and will cost about $50 million dollars to modify some pipelines and equipment in continuous production.

Zijin showed that a third, larger beneficiation plant is being designed and will be commissioned in the fourth quarter of 2024. Apart from Zijin and Ivanhoe, the DRC’s government owns 20% of Kamoa-Kakula shares, and Crystal River Global Limited holds 0.8%.

In November, an investment of $769 million in smelters was approved to reduce the project's reliance on third-party smelters for ore processing. And the factory is expected to take three years to build.

 

 

 

3、Spot Copper Premiums Narrowed to Small Discounts because of the Large Quantities of Arrivals

Today, SHFE copper cathode spots were quoted at discounts of 30-0 yuan/mt over March contract, and the average price discounts were 15 yuan/mt, down 50 yuan/mt from the previous trading day. The traded prices of standard-grade copper were 71,120-71,220 yuan/mt, and that of high-grade copper were 71,130-71,240 yuan/mt. SHFE copper prices dropped in the overnight trading. In the morning market, the prices first fluctuated narrowly around 71,050 yuan/mt, then fell slightly around 71,180 yuan/mt after rising to 71,320 yuan/mt. After 11 o'clock, the prices continued to fall to the daily average line.

Spot premiums and discounts declined today, and the prices stabilized only when they fell to small discounts. Standard-quality copper prices in morning trading opened the same as that in midday yesterday at the premiums of 20 yuan/mt, but there was no transaction in the market. With the inflow of a large number of high-quality copper, such as Jinchuan’s plates, the high-quality copper quotation in the market decreased, which suppressed the quotes of standard-grade copper. So the quotation of high-quality copper was almost consistent with that of standard-grade copper. Around 9: 50, the standard-grade copper prices dropped to the discounts of 20-0 yuan/mt. In order to clinch a deal, some traders reduced the prices to discounts of 30 yuan/mt to make a small amount of transactions. Guiye high-quality copper refused to lower its prices with the falling trend of high-quality and standard-grade copper prices, and remained at the premiums of 30 yuan/mt. The traders were not willing to reduce the prices. Hydro-copper also showed a rapid dropping with high-quality and standard-grade copper prices. Some companies, such as ESOX, quoted at the discounts of 100 yuan/mt to make a small amount of transactions

The premiums narrowed to small discounts mainly because the decreased consumption brought by the pandemic in Jiangsu, and the suppressed spot premiums affected by the shipment of goods from some smelters to Shanghai. If the smelter's products continue to be sent to Shanghai in large quantities, it is expected that the premiums and discounts can hardly recover and rise.

 

 

 

4、Copper Prices Fluctuated in a Wide Range amid Tense International Situation

During last week, the conflict between Ukraine and Russia got worse. A rumour spread in the market that Ukrainian armed forces fired mortar shells and grenades at four regions in Luhansk People's Republic (LPR). Affected by this situation, the international oil prices fluctuated sharply, and the gold prices rose rapidly, indicating strong risk aversion sentiment in the market. The copper prices fluctuated for a short time accordingly. From the macro perspective, the market still focused on the actions of the US Fed. Last week, the minutes of FOMC meeting released by the US Fed did not send out more hawkish signals. There were still some divergences in the market of raising interest rates by 25bp or 50bp in March. It is expected that the market will remain stable before the decision is made. The YoY growth of domestic CPI and PPI both narrowed. China CPI is expected to maintain a moderate increase, while the increase of PPI will fall further. Keeping the prices stable is the foundation of domestic macro development in the later period. Therefore, in the case of tight policy abroad and easing policy at home, the copper prices may again move rangebound in the short term.

On the fundamentals, the market moves were still dominated global low inventory. Domestic supply of copper cathode fell short of expectations, which caused concerns about the later supply and the accumulation of stocks in February and March to some extent. The overall consumption is unlikely to pick up significantly based on the current progress of resumption of production after the CNY holiday. It was understood that cement operating rates dropped compared with the same period last year, indicating that the overall operating rates of both infrastructure and real estate could not support the improvement of copper consumption in the short term. Copper prices are once again subject to the low inventory.

The most-traded SHFE 2204 copper contract is expected to trade between 70,500-72,500 yuan/mt this week, and LME copper will trade between $9,850-10,200/mt.