Andy Home’s article points out Chilean state producer Codelco has been able to lift its “benchmark” premium for Chinese deliveries next year from $98 per ton over LME cash to $138, yet the copper market, if you all remember, is supposed to be in surplus.
Meanwhile, premiums for bonded metal in Shanghai, Reuters reports, are as high as $200 per ton.
But here’s the puzzle: refiners are only running at 78.5% capacity utilization, fractionally down on last year’s 79% capacity. So much for 2013, then – maybe in 2014 they will take advantage of the strong market and increase output, as that excess of concentrate works its way through to an excess of refined metal, putting pressure on the LME/SHFE exchange prices, and forcing them down. Well, maybe…and then again, maybe not.
What’s the exchange price outlook, then?
High physical premiums and falling exchange inventory are a result of physical demand (not necessarily physical consumption, mind, but certainly demand), and that demand is coming from China.
In spite of cooling industrial activity, China is importing considerable quantities of copper. Some of the metal is being consumed, but a very significant proportion is probably being used in the shadow-banking market as collateral to underpin financing deals.
Reuters concludes that while there is no doubt that concentrate supply will increase and there is little doubt refined metal production will rise in response to the greater concentrate availability and much higher treatment charges available, it is not clear if this will result in greater refined metal availability and hence a fall in exchange prices.
What This Means For Copper Buyers
If physical premiums remain high, exchange prices will remain well supported.
We have seen a disconnect between physical premiums and exchange prices in the aluminum market (check out our Aluminum Outlook 2014), but that has much to do with the involvement of the financial community.
Here, a different financial community is having a different impact on the copper market, and it may well support prices when the rest of the world is expecting a surplus to cause a fall.