SHANGHAI, Dec. 13 (SMM) –
Domestic copper smelters have taken preliminary steps in preparation for negotiations to set premiums for 2011 domestic long-term copper contracts. According to market sources, opinions are mixed among smelters towards the 2011 premiums and no consensus among smelters has been reached.
After a survey of domestic smelters, traders, and downstream producers concerning the issue, SMM believes the premiums for 2011 will remain flat at 2010 levels, or around RMB 300/mt, due to the following reasons.
First, Codelco has already announced premiums for copper deliveries to Chinese buyers at USD 115/mt, up as much as 35% from the USD 85/mt premium in 2010. The large increase in premiums is an indication of Codelco’s optimistic outlook towards demand in China in 2011, but also signals lower delivery volumes to China in the coming year compared with 2010. In this context, there is little chance premiums for the domestic copper contracts in 2011 will fall significantly. However, the average spot premium and discount as of December 9th was negative RMB 83/mt, compared to an average of positive RMB 169/mt in 2009. This was a reflection of the fact that long-term contract prices for traders or downstream producers who signed the 2010 long-term contracts were higher than spot prices. This contradiction will cause uncertainty during negotiations for the 2011 domestic long-term contracts. Although large spot discounts during 2010 have been closely related to the release of inventories and increases in scrap copper supply, those who signed 2010 long-term contracts were in an unfavorable position. If premiums for 2011 domestic long-term contracts continue to rise, enthusiasm for signing long-term contracts will evaporate quickly.
In this context, SMM believes premiums for 2011 domestic long-term copper contracts will be flat at 2010 levels. Both domestic copper smelters and downstream producers will sign some proportion of long-term contracts since as all sales or purchases on a spot price basis would be too risky for smelters and downstream producers. SMM also believes the proportion of long-term contracts in 2011 will not change significantly from 2010.
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