Social Inventory Drops to Annual Low: Why Have Spot Premiums in East China Been Underperforming? [SMM Analysis]

Since November, China's social inventory has been experiencing mild destocking. As of December 5, 2024, social inventory in the Shanghai area has fallen below 100,000 mt, and social inventory in Guangdong, Jiangsu, and other regions has also nearly depleted. However, compared to the high spot premiums in Guangdong, the East China market has consistently shown mediocre performance. What are the reasons behind this?

In terms of overall supply, the volume of imported copper cathode entering the Shanghai area in November continued to rise compared to October. Due to the long-term opening of the import profit window, overseas importers have locked in a large amount of arbitrage imported sources. A significant portion of these imports comes from non-registered regions such as Africa, Russia, and Kazakhstan, which has a noticeable drag on the spot premiums of standard-quality copper. Domestically, the production of domestic smelters hit a new high in November. Although some supplies were transferred to South China due to tight inventory in that region, arrivals in East China remained substantial. Additionally, as the year-end approaches, the frequency of transactions by suppliers increased significantly due to the window for bill transactions. Therefore, the overall center of spot premiums in the market remained low.

From the demand side, there are three main reasons for the inventory reduction in November: 1. Some copper semis processing enterprises were rushing to meet export deadlines, significantly increasing their operating rates in the short term. 2. Continuous declines in copper prices led to a noticeable increase in downstream orders, providing support for spot premiums. 3. The operating rate of secondary copper rod producers remained lower-than-expected, supporting copper cathode consumption through the substitution effect. However, the rush to meet export deadlines is expected to slow down in December, copper prices are likely to rise in the short term, the operating rate of scrap enterprises is expected to rebound, and the price difference between copper cathode and copper scrap will become apparent. Meanwhile, smelters in north China will complete their maintenance, making it difficult to hold an optimistic demand outlook for December.