Low inventories, post-holiday demand to shore up copper prices

SHANGHAI, Feb 11 (SMM) – Shanghai copper futures prices are widely expected to strengthen as inventories stay at relatively low levels and as downstream demand would pick up after the Chinese New Year holiday.

The three-month copper contract on the London Metal Exchange rallied from earlier lows last week, closing at $6,201.5/mt on Friday February 8. It gained $60/mt, or 0.98% from the closing price of $6,141.5/mt on Friday February 1. The buildup of long positions accounted for the increase in LME copper, with open interest up 7,547 lots to 289,000 lots.

Gains in LME copper drove the most traded copper contract on the Shanghai Futures Exchange to a higher open at 48,440 yuan/mt on the first trading day after the CNY break.

Copper inventories across SHFE-registered warehouses stood at 142,700 mt as of February 1, up 23,000 mt from January 25, SMM data showed. A gain of 15,000 mt in Shanghai and a gain of 5,700 mt in Guangdong contributed to the increase in overall stocks.

Stocks across LME-registered warehouses shrank 750 mt from February 1 to stand at 149,200 mt as of February 8, SMM data showed. Inventories before the CNY break stood much lower than last year, even as stocks expanded from the holiday impact.

In the physical market, trades were quiet today as most firms have yet to recover from the holiday and as the imminent expiration of the SHFE front-month contract drove sellers to offer high, which held back traders from making purchases. Spot premiums were heard up to 50 yuan/mt in morning trade. Trades remained poor even as spot premiums declined later in the day.

After talks in January, top US officials will have a new round of negotiations with Chinese officials this week in a bid to resolve trade differences ahead of a March 1 deadline. This, together with the dovish stance of the Federal Reserve, is likely to improve risk sentiment among investors, weigh on the US dollar and provide support to copper prices.

Treatment charges (TCs) for spot copper concentrate dropped in the last trading week before the CNY holiday as restocking demand lowered the negotiating power of small and medium-sized smelters.

SMM assessments showed that TCs for spot clean copper concentrate stood at $80-88/mt as of Friday February 1, down $7/mt from a week ago and lower than the floor charges of $92/mt, set by the China Smelters Purchase Team (CSPT) for the first quarter.

This surprised the market that expected spot copper concentrate TCs to remain relatively high in the first half of 2019, given scheduled maintenance across global copper smelters, continued suspension of Vedanta’s copper smelter in India and the possibility of slower capacity expansion in China.

SMM learned that transactions by small and medium-sized smelters who are not members of CSPT accounted for the decline in TCs. Those smelters rely more on spot cargoes than long-term contracted supplies.

The smooth commissioning and operation of new copper smelting capacity in China and rising hopes of the restart at Vedanta’s copper smelter eroded the bargaining power of smelters who needed to restock, resulting in a drop in spot copper concentrate TCs.

The upcoming start of maintenance across global copper smelters and delayed restart of Codelco's smelters might provide some support to spot copper concentrate TCs after the CNY break, while TCs are likely to see declines in the longer term.

Codelco’s Chuquicamata and Ministro Hales copper mines and Freeport-McMoRan’s El Abra mine halted operations last week due to heavy rains in northern Chile. The three mines own total capacity of about 550,000 mt.