Rising Natural Gas Prices Further Squeeze Profits of Copper Rod Enterprises

SHANGHAI, Feb 24 (SMM) – The war between Russia and Ukraine officially started, and the spot price of TTF natural gas on the European Energy Exchange rose about 10% on February 23. US natural gas futures prices also rose more than 6%.

The domestic natural gas prices are driven up by the overseas prices. The data of Shanghai Petroleum and Natural Gas Exchange showed that the Chinese LNG ex-factory price was 8,314 yuan/mt as of February 23, up 140% on the year, and an increase of 67% on the month.

Before the Chinese New Year, the natural gas prices in China was just slightly higher than that in December 2021.

However, due to the rising prices of natural gas recently, the upstream gas source units have limited the supply, and some regions saw large supply gap of natural gas. In order to ensure the normal gas consumption of residential users, the gas supply for industrial enterprises is likely to be urgently shut down.

According to our SMM survey, the copper cathode rod enterprises in some regions have received the gas restriction notice, but the gas restriction has not been implemented for the time being, which has not affected the actual production.

The conversion cost of copper cathode rod is about 430 yuan/mt, in which the cost for energy accounts for about 52.2%, including hydropower, natural gas, etc., and the natural gas expenditure accounts for more than 75% of the total energy cost.

The cost of auxiliary materials takes up 18.3%, and the depreciation costs are also high. The costs of manpower, maintenance and other costs account for 9.1%, 4.7%, and 2.6% respectively.

It takes more than 40 cubic meters of natural gas to produce one tonne of copper cathode rods. Hence the surge of natural gas prices will impact the copper cathode rod enterprises significantly.

The current supply of copper cathode rod is far higher than the demand. Although the producers have raised the conversion margins by 20-50% for the long-term orders in 2022, their profits will continue to be squeezed if the natural gas prices rises again.

The conversion margins across the country are standing low due to the poor downstream consumption and low premiums of copper cathode. The profits of the copper cathode rod enterprises in some regions were around the break-even point.

The average conversion margin of 8mm power rod in east China is 575 yuan/mt (including premiums&discounts) and 585 yuan/mt (excluding premiums&discounts), and the profit is only around 100 yuan/mt.

The average conversion margin of 8mm power rod in south China is 340 yuan/mt (including premiums&discounts) and 500 yuan/mt (excluding premiums&discounts), and the profit is lower than 100 yuan/mt.