1.Reasons for Huge Fluctuations in Spot Copper Premiums in Shanghai

According to SMM statistics, as October 25, the average #1 copper premium was 425 yuan/mt, down nearly 50% in just two days.  Reasons for the significant decline:

1. Due to the overloaded operation of a warehouse in Shanghai last Thursday and Friday, many warrants were stuck. Therefore, the goods available in the market were few and the premiums of spot goods were high. However, the situation was eased in the afternoon of last Friday and returned to normal on Monday, which led to the increase in the available goods in the market. As a result, the premiums fell.

2. In the past four trading days, the prices of copper rose continuously, and downstream enterprises were not eager to purchase. In addition, the price spread between copper cathode and copper scrap expanded. As of today, the price spread widened to 1,700 yuan/mt, and downstream cable factories generally purchased secondary copper rod. As such, the operating rates of copper cathode rod enterprises dropped significantly.

3. Affected by the lower overseas prices in the previous period, some imported copper began to flow into the market in Shanghai. Some cargo holders began to lower their prices, which further reduced the spot premiums.

4. The warrants began to flow out of the market after the delivery of SHFE 2210 contract. The warrants in Shanghai dropped 19,942 mt in just few days. It is expected that more warrants will flow out of the market in the future.

SMM believes that the copper premiums in Shanghai may further fall in the next few days amid the bearish factors.

 

 

2. Copper Inventory across Major Chinese Markets Down 18,600 mt over Weekend

As of Monday October 24, SMM copper inventory across major Chinese markets stood at 106,500 mt, down 18,600 mt from last Friday but up 7,900 mt from the same period last year when the data was 98,600 mt. The inventory in all regions of China decreased. In detail, the inventory in Shanghai decreased 8,200 mt to 74,600 mt, the inventory in Guangdong dropped 2,400 mt to 11,100 mt, the inventory in Jiangsu dipped 6,500 mt to 17,100 mt, the inventory in Tianjin fell 1,000 mt to 2,000 mt, and the inventory in Chengdu and Chongqing fell slightly.

Lower inventory in Shanghai was caused by the decreased copper arrivals and the average downstream consumption. In Guangdong, the inventory dropped as the arrivals of imported and domestic copper (some smelters were under maintenance) were low. In Tianjin, the inventory dropped due to the fewer arrivals. Since last week, smelters in north China have begun to actively ship goods to the east.

Looking forward, the arrival of imported and domestic copper will decrease this week. The total supply will be lower than last week, and the downstream demand will also be weaker due to the end-of-month factor. SMM believes that the inventory will fall this week.

 

3.TCs of Spot Copper Concentrates were Supported by the Slack Demand from Smelters

After the copper price hit a multi-year low in mid-to-late July 2022, it stopped falling and rebounded. Copper scrap traders refrained from selling amid losses earlier, and were still reluctant to sell even after copper prices rallied as they awaited further price hike, resulting in short supply as a whole.

1. Structural shortage of blister copper amid narrowing copper cathode and scrap spread

After the copper price hit a multi-year low in mid-to-late July 2022, it stopped falling and rebounded. Copper scrap traders refrained from selling amid losses earlier, and were still reluctant to sell even after copper prices rallied as they awaited further price hike, resulting in short supply as a whole. The spread between copper cathode and scrap failed to narrow despite rebounding copper prices, as copper scrap supply was quite tight. In contrary, the spread once narrowed to around 500 yuan/mt entering August. 

As such, the supply of secondary copper tightened as well, which restricted the supply of blister copper produced with copper scrap. According to SMM database, domestic copper scrap productio

 

 

 

 

 

 

 

4.Resilient Fundamentals Firmly Supported the Copper Prices

On the macro front, the initial jobless claims in the US released two weeks ago was lower than expected, and the unemployment rate stood at 3.5%, the lowest in history. Philadelphia Fed’s Harker said the US Fed will continue to raise the short-term interest rate to temper the high inflation. US existing home sales fell for the eighth consecutive month in September as the demand was seriously suppressed by the potential rises in the interest rate. In Europe, British Prime Minister Liz Truss launched a large-scale residential subsidy and corporate tax cuts, and the British pound plunged in value to the dollar by more than 20% in a week. In China, the six major state-owned banks will provide at least 600 billion yuan in real estate financing, but it is far from enough to fill the real estate financial gap. More importantly, it will take some time for the policy to take effect. But in the short term, the move will boost the market confidence to some extent. In addition, the 20th CPC National Congress still puts economy development as the top priority, and the direction of major policies does not change much.

On the fundamentals, LME copper inventories in Asia gradually flowed into the domestic market stimulated by the considerable import profits. As of last Friday, LME copper inventory dipped 8,325 mt to 137,325 mt, which contradicted the domestic inventory trend. In the follow-up period, the market shall pay attention to the change in LME inventory. And the spot premiums are expected to fall first and then rise. Copper inventory in major Chinese markets totalled 125,100 mt, up 14,800 mt WoW, due to the delivery of smelters and the arrival of imported copper. The copper cathode consumption was suppressed by the large spread between the copper cathode and copper scrap, the wide SHFE copper spread, and the high spot premiums. As for the terminals, the State Grid placed orders slowly and prolonged the delivery time. Besides, the pandemic outbreaks in various places of China threw cold water on the operating rates of construction projects.

In general, the US Fed will insist on raising the interest rate at the November meeting, which will put further pressure on the finance. The flow of imported copper and domestic warrants into the market will ease the spot supply tightness, but the downstream consumption is still resilient. The large-scale LME cancelled warrants suggest that the market is nourishing a new round of short squeeze. The fall in copper prices will slow down with strong support. Copper prices will fluctuate with occasional drops this week. The most-traded SHFE copper is expected to move between 61,500-63,500 yuan/mt, and LME copper will trade between $7,350-7,550/mt.

In the spot market, the congestion of ownership transfer in a warehouse in Shanghai last week aroused risk aversion sentiment in the market, and the spot premiums stood firm and high. The spot premiums will fall this week with the flowing of delivered goods into the market. Spot premiums are expected to move between 400-700 yuan/mt over the SHFE 2211 copper.

 

 

 

5. WBMS: Global Copper Market Saw a Supply Deficit of 657,000 mt from January to August, 2022

According to the report released by World Bureau of Metal Statistics (WBMS) on October 19, the global copper market recorded a deficit of 657,000 mt in January to August 2022, which follows a deficit of 283,000 mt in the whole of 2021.

Reported LME stocks (including off warrant stocks) at the end of August 2022 were 48,000 mt higher than at the end of December 2021. Net deliveries out of SHFE warehouses were 3,300 mt and Comex stocks decreased by 13,900 mt.

World mine output in January to August 2022 was 14.27 million mt, up 1.7% compared with the first eight months of 2021. Global cooper cathode output for January to August 2022 was 16.4 million mt, up 1.3% compared with the previous year with significant increases recorded in China and India of 251,000 mt and 52,000 mt respectively.

Global demand in January to August 2022 was 17.07 million mt, which was 4.3% higher than the total recorded for January to August 2021. During the same period, Chinese apparent demand was 9.44 million mt, which was 5.2 % higher than the comparable period in 2021. Reported output of semi manufactures in China rose by 2.1%. US copper cathode output was 651,100 mt, which was 7,400 mt higher than the comparable months of 2021.

August metal balances for copper cathode recorded production at 2.07 million mt and demand at 2.24 million mt.