What would happen if copper cathode inventories decreased significantly?

Copper prices rebounded from lows in April. At the beginning of the month, due to Trump's frequent changes in tariff negotiations, market concerns about a trade war weighed on non-ferrous metals, with copper bearing the brunt. LME copper fell to $8,150/mt, and SHFE copper hit the daily limit down. The LME-COMEX price spread briefly narrowed, but as market sentiment about tariff "uncertainties" waned, the US continued to absorb copper cathode.

According to SMM's communication with the market, when SHFE copper fell below 75,000 yuan/mt, downstream orders significantly exceeded expectations, followed by a rush to buy amid continuous price rise, pushing copper prices back to around 77,000 yuan/mt. Spot transactions were active across various regions in April, with SMM smelter production reaching 1.1257 million mt. Against the backdrop of tight copper scrap supply in April, some enterprises indicated that they had stocked up on copper scrap raw materials in March, and the supplementary imports of anode plates in April boosted copper cathode production at smelters that do not use copper concentrates.

However, the East China market currently mainly trades registered copper cathode cargoes and imported non-registered cargoes from Africa, Russia, Kazakhstan, etc., with the supply of deliverable-grade cargoes increasingly dwindling. With both domestic arrivals and imports being low, active outflows led to a larger-than-expected decline in inventory, with the BACK spread between nearby and deferred months continuing to rise.

1. Continuous inventory destocking strongly supports spot premiums/discounts
According to SMM data, social inventory of copper cathode in China decreased by approximately 200,000 mt in April, with about 110,000 mt destocked in the Shanghai area. Spot premiums rose from 10 yuan/mt at the beginning of the month to over 200 yuan/mt by month-end.

2. The spread between nearby and deferred months widened significantly, with more speculation in deferred months, and the annual trend approaching that of 2023
The BACK spread between nearby and deferred months widened to 200 yuan/mt and then hovered, failing to further expand to 300 yuan/mt as expected. Most speculators positioned their holdings in July, August, and September, with more arbitrage opportunities in the deferred BACK spread.

However, considering the current proportion of warrants to social inventory, which continues to decline amid inventory destocking, the risk of a squeeze has risen. It is expected that the SHFE copper BACK spread between nearby and deferred months will widen to 300-400 yuan/mt before contract rollover, with attention to extreme spread changes near the final trading day.

3. Tight copper scrap supply in April makes non-registered copper cathode the preferred choice for downstream procurement
Due to US tariff disruptions and policies in the recycling industry, copper scrap shipments tightened, with imported non-registered and non-standard cargoes serving as substitutes, while also promoting copper cathode destocking. SMM's price spread between wet-process and non-registered copper provided clear guidance for the price difference between primary metal and scrap, which generally converged in April.

4. Subsequent smelter maintenance plans both domestically and overseas, coupled with amplified disruptions to overseas anode plates, further weaken copper concentrate TC
At the end of March 2025, Glencore Plc suspended copper shipments from its Altonorte smelter in Chile due to impacts on the smelting furnace. The smelter mainly produces customized anode copper, with an annual production capacity of approximately 350,000 mt in metal content. An anode copper smelter in Zambia with a capacity of 350,000 mt in metal content is scheduled for maintenance from April to June 2025, which will affect production. On April 25, the SMM Imported Copper Concentrate Index (weekly) was reported at -$42.61/dmt, a decrease of $0.09/dmt from the previous -$42.52/dmt. The pricing coefficient for domestic ore with a grade of 20% ranges from 93% to 95%.

In May, five domestic smelters have maintenance plans, with an estimated impact of 21,000 mt on copper cathode production. There are still concentrated maintenance plans from July to September.

In summary, supported by April's consumption, the low inventory situation in May supports the nearby month structure and premiums. However, the market is concerned that export orders may decline from late May to late June due to tariff uncertainties, affecting the continuity and enthusiasm of end-user procurement. As May progresses, while supply issues persist, whether consumption can continue to improve or even maintain remains to be seen. Currently, the SHFE copper 2505-2506 contract spread is expected to widen to 500 yuan/mt before delivery, with the deferred month structure still expected to continue widening.