Copper Prices and Spot Premiums Rise: Where is the Confidence in the Spot Market? [SMM Analysis]

Although there were only three trading days last week, both copper prices and SHFE spot copper premiums continued to rise. Is this due to downstream buying sentiment or supply disruptions?

I. Spot Market Overview Last Week

Wednesday was the last trading day for the SHFE copper 2409 contract. The futures structure of SHFE copper 2409 and 2410 contracts fluctuated between Backwardation and Contango, with market quotations at a premium of 0-60 yuan/mt over the SHFE copper 2410 contract. On the last trading day, some downstream buyers chose to purchase based on SHFE copper 2410 contract or opted for buying SHFE futures contracts and waiting for delivery. On Thursday, copper prices rose above 75,000 yuan/mt, and downstream enthusiasm for spot purchases remained high, especially in Changzhou, where spot purchase volumes increased, leading to higher transaction prices in both Shanghai and Changzhou. Meanwhile, delivery sources were not released, resulting in relatively tight market supply. On Friday, the spot market buying sentiment did not decline directly as copper prices surged to 76,000 yuan/mt. Some downstream buyers exhibited a rush to purchase amid continuous price rises and held back amid price downturn sentiment, and with only three trading days last week, the procurement pressure was significant. It is reported that the operational efficiency of some Shanghai ports was low on the day, and the imported copper expected to flow into domestic trade on Friday did not arrive as scheduled, further tightening the available spot supply and pushing premiums higher from the morning.

II. Supply Disruption Factors

China Daye Non-Ferrous Metals (00661.HK) announced that a fire broke out in a device of the Group’s Yangxin Hongsheng Copper Industry Company Limited, located in Huangshi Xingang (Logistics) Industrial Park, Hubei Province, China on 14 September 2024 at 5:00 p.m., resulting in the thermal smelting furnace and blowing furnace systems shut down and entered into the heat preservation state. The fire was put out at about 8:30 p.m. at the same day, and no casualties were caused. The cause of the fire accident is still under investigation. The annual output of cathode copper of the Group was 625,200 mt last year. After excluding the production reduction due to the fire incident, the expected output of cathode copper is 680,000 mt this year. However, due to the sharp fall of the smelting processing fee TC/RC in 2024, the Board expected that the fire shutdown and production reduction do not have a significant adverse impact on the annual operation and performance in 2024.

According to an SMM survey, this smelter primarily supplies long-term copper cathode orders to customers in Jiangsu Province, mainly copper rod and copper tube clients. Based on SMM statistics, the group's production from January to August was 555,600 mt. Assuming the annual production is 680,000 mt as stated in the announcement, the total production from September to December is expected to be only 124,400 mt, averaging 31,100 mt per month.

This will somewhat affect the long-term copper cathode order quantities for some enterprises in Jiangsu Province, leading them to turn to spot orders in the market. It is worth noting that there is only one smelter in Jiangsu Province, and it is currently operating at a 20-30% reduction. Therefore, the supply of copper cathode in Jiangsu Province will decrease, and as of now, SMM has not learned of any traders or smelters planning to send more supplies to Jiangsu in the future.

This incident did not immediately boost spot market purchasing sentiment, but last week, spot transaction prices in Jiangsu Province were indeed higher than in Shanghai, and downstream purchases from Shanghai to Jiangsu increased. The actual impact will still depend on demand conditions.

Meanwhile, due to the impact of Typhoon No. 14 "Pulasan," the Yangshan Port area, Waigaoqiao Port area, Wusong Port area Yidong Terminal, and Luojing Port area Luodong Terminal planned to suspend empty container operations from 7:00 PM on September 19, 2024, to 8:00 AM on September 20, 2024. Therefore, the volume of imported copper entering the market last week was limited, affecting supply.

III. Demand Side Sentiment

Last week (September 13-19), the weekly operating rate of major domestic copper cathode rod makers recorded 79.32%, down 2.40 percentage points WoW and 1.54 percentage points below the expected value. During the Mid-Autumn Festival, copper cathode rod makers conducted maintenance as needed, leading to a predictable decline in the weekly operating rate. This week (September 20-26), supported by current production schedules and downstream rigid demand, coupled with the demand for finished product inventory before the National Day holiday, the weekly operating rate is expected to rise to 83.69%. Some copper rod makers also showed stocking sentiment last week.

Although the operating rate of secondary copper rod slightly recovered, it has not yet differentiated the consumption of copper cathode rod. Therefore, the consumption side of copper cathode remains promising before the National Day holiday.

In summary, both copper prices and premiums rose last week, with supply-side factors playing a significant role, while the demand side may exert more influence this week.