Concerns Over Ore Supply Tightness Intensify, SHFE Copper Breaks the Deadlock [Wenhua Observation]

Since recovering from the impact of global trade disputes in early April, SHFE copper has experienced low volatility, with futures prices fluctuating rangebound near the 79,000 level for an extended period. Recently, with the start of the US Fed's interest rate cut cycle, copper prices have shown signs of strengthening, and SHFE copper once broke above the 80,000 mark. However, high prices suppressed demand, and the key level was lost again, indicating a less solid foundation for the rally. Yesterday, supply disruption concerns suddenly intensified, driving both domestic and international copper prices higher. SHFE copper finally broke away from the low volatility pattern, decisively breaking through the trading range and hitting a nearly six-month high. How significant is the impact of this mine-side disruption? Will the strong momentum in copper prices continue?

Grasberg Mine Disruption Escalates, Worsening Ore Tightness

Yesterday, Freeport declared force majeure at the Indonesian Grasberg mine and lowered its copper and gold sales forecast, boosting domestic and international copper prices. Grasberg is the world's second-largest copper mine and has a high ore grade. With the transition from open-pit to underground mining, its copper production increased to around 800,000 mt in 2024, accounting for over 3% of global supply. Therefore, news of its production disruption has drawn significant market attention.

This supply disruption incident traces back to the beginning of the month. On the evening of September 8 local time, a large-scale wet ore material inflow accident occurred in a production area of the Grasberg underground mine in Central Papua Province, Indonesia, disrupting access to some areas within the mine shaft and trapping seven contractor employees engaged in mine development work. To ensure the safe evacuation of workers, all mining operations at the Grasberg mine were suspended at that time. However, the market initially assessed the impact as likely short-term, and mid-month, an Indonesian mining official stated that a relatively small area of the copper mine was still operational. Consequently, earlier supply disruption concerns did not significantly intensify and failed to provide substantial momentum for copper price movements.

However, yesterday's update from Freeport on the mud rush accident at the Grasberg Block Cave mine indicated that search and rescue efforts are ongoing. Although the incident occurred in the PB1C block, one of five production blocks, it caused damage to infrastructure supporting other production areas. Freeport Indonesia also lowered its consolidated sales guidance for Q3, with copper down 4%. Furthermore, a preliminary assessment suggests that, according to the current phased restart plan, the mine could potentially return to pre-incident operating rates by 2027. Freeport Indonesia's 2026 copper production target has been reduced by 35% compared to the pre-incident target. The development of the situation has clearly exceeded market expectations, significantly heightening concerns about ore tightness and driving a strong rally in copper prices.

It is worth noting that this is not the first major copper mine disruption this year. In mid-May, the Kakula copper mine, owned by Ivanhoe Mines, was forced to close due to severe flooding triggered by an earthquake. In June, Ivanhoe Mines revised down its 2025 copper production guidance for the Kamoa-Kakula complex, the largest copper mine in Africa, by 28%. Apart from this, strikes, accidents, and other factors have caused disruptions in copper mines in traditional major supply countries like Chile and Peru, continuously exposing the vulnerability of copper ore supply. Against this backdrop, spot copper concentrate TCs in China turned negative this year and continued to weaken, currently hovering around -$40/dmt, indicating tight copper ore supply and demand and a significant increase in mine negotiation leverage. The escalation of the impact from the Grasberg mine accident is likely to intensify ore supply tightness, potentially leading to downward revisions in copper ore production growth expectations for this year and next. By year-end, domestic smelters may still lack initiative in next year's copper concentrate long-term contract TC negotiations.

Copper Cathode Production Expected to Decline, Supply and Demand in a Tight Balance

Copper ore supply tightness and extremely low TCs have long troubled the copper market. However, previously, thanks to supplements from other raw materials and profit compensation from by-products like sulphuric acid and gold, domestic smelters maintained relatively stable production pace, and copper cathode production remained high. Recently, however, new changes have emerged in the copper production chain. On one hand, supply of substitutes on the raw material side, such as copper anode, is becoming increasingly tight with a trend of further tightening. SMM data shows that the operating rate of smelters not using copper concentrates (using copper scrap or anode plates) was 59.9% in September, down 8.3 percentage points MoM. On the other hand, domestic sulphuric acid prices began to pull back from late August, leading to a decline in profits from these by-products, though the short-term decrease is limited, and further downside room needs monitoring. Currently, institutions predict a decline in China's copper cathode production in September based on production schedules, with a potential continued drop in October, indicating that ore tightness is starting to impact the smelting sector. Meanwhile, the Copper Branch of the China Nonferrous Metals Industry Association held a meeting yesterday, where the vice president emphasized that copper industry enterprises must resolutely oppose "involutionary" competition in the copper smelting sector. Amid the domestic anti-involution atmosphere, future attention should be paid to whether specific policies strictly controlling copper smelting capacity expansion will be introduced.

After the implementation of US import copper tariffs with a narrower scope than expected, COMEX copper inventories continued to increase, rising by approximately 60,000 mt since the end of July. However, copper inventories in non-US regions have not accumulated persistently as previously feared. LME copper inventories briefly rebounded before pulling back again, with current levels not significantly different from late July. The accumulation of domestic copper social inventory has also been limited, below 30,000 mt, remaining at relatively low levels both year-on-year and within the year. September is the traditional peak season for metals in China. Influenced by copper prices fluctuating at highs around the 80,000 yuan mark, downstream demand has been somewhat constrained. Since the beginning of the month, spot copper premiums have continued to pull back, with limited improvement in end-use demand. As the National Day holiday approaches, downstream stockpiling sentiment remains relatively mediocre. The peak season performance is not robust but shows some resilience, hardly indicating a collapse.

Data Source: Webstock Inc.

Overall, on the external sentiment front, the US Fed cut interest rates slightly as expected in September, and is expected to implement two more rate cuts within the year. Overseas liquidity remains relatively loose, and the US dollar index continues to be under pressure. On the industrial front, the contradiction of copper ore supply tightness has begun to intensify, finally showing signs of transmission to the smelting side. Coupled with the domestic anti-involution atmosphere, concerns over tight supply are heating up. Meanwhile, demand shows some resilience, and the accumulation of global copper inventories is limited, making it difficult to cause significant additional drag in the short term. Recently, bullish factors have converged, with the macro front and the industrial side forming a resonance, allowing copper prices to break through previous resistance levels in one go. Currently, the copper market is dominated by strong optimism, and copper prices are expected to hold up well. However, after the bullish sentiment driven by recent news is largely digested, attention should still be paid to the implementation of production cuts on the smelting side. Caution is also warranted regarding the potential suppression of downstream demand by high prices after the peak season.

(Comprehensive Report by Webstock)