Since the beginning of this year, due to weak demand for copper cathode, spot premiums were mostly negative except around monthly contract delivery. The SHFE copper structure was also largely in Contango. However, since August, spot premiums have shown continuous improvement, being positive most of the time, and the futures structure has experienced a brief shift from Contango to Backwardation.
First, in terms of prices, SHFE copper futures prices dropped from around 75,000 yuan/mt in early August to around 72,000 yuan/mt in mid-August, and then again from around 75,000 yuan/mt in late August to around 71,500 yuan/mt in early September. These two waves of price declines benefited downstream consumption, and the copper cathode market gradually entered the traditional September-October peak season. Downstream demand for copper cathode increased, which is also reflected in the outflows from social warehouses in Shanghai and Guangdong.
Furthermore, starting from August 1, the implementation of the Fair Competition Review Regulations aimed to revoke the tax refund and fiscal subsidy policies provided by provincial and municipal governments to recycling enterprises. Local governments are still unable to clarify how to manage raw material procurement for these enterprises in the future. Consequently, many recycling enterprises are in a state of shutdown or reduced production, significantly weakening the substitution effect of secondary copper and benefiting copper cathode consumption. The operating rate for secondary copper rod producers hit a historical low, while that for copper cathode rod producers surged to high levels.
Lastly, in August, the production of copper cathode declined MoM due to maintenance and reduced blister copper and copper anode supply, marginally reducing supply and assisting the shift in structure and premiums. According to SMM statistics, China's copper cathode production in August was 1.0135 million mt, down 14,700 mt MoM (a 1.43% decrease) but up 2.48% YoY.
In summary, the combined factors of declining futures prices, increased demand for copper cathode, and marginal reduction in copper cathode supply led to accelerated de-stocking in SMM social inventory, ultimately resulting in recovering spot premiums for copper cathode and a gradual shift in the futures structure from Contango to Backwardation.
