Significant Price Spread Between Shanghai and Guangdong: How Long Can the Premiums Last? [SMM Analysis]

During the 2024 "Asia Copper Week" conference, the market is closely monitoring domestic copper cathode consumption in 2024. On one hand, both domestic and international physical premiums are strongly correlated with consumption growth rates. On the other hand, negotiations for long-term contracts for copper cathode in 2025 are approaching. Since H2, domestic copper cathode inventories have turned to dropping. Although consumption has shown some improvement, spot premiums have remained lukewarm. At this point, why have recent premiums in South and East China suddenly risen? What impact will this have going forward? The following is a detailed analysis.

Firstly, recent maintenance at some smelters in the surrounding areas of South China has led to a reduction in overall market supply, as inventory is reserved for shipments under long-term contracts. This has caused premiums to rise first in South China, creating a significant price spread with East China, forcing premiums in East China to rise as well. Additionally, suppliers have been sending some cargoes to South China for cross-regional arbitrage, leading to an overall increase in spot premiums in both regions. Secondly, with copper prices continuously declining recently, downstream orders have seen a significant increase, providing support for spot premiums. Lastly, the operating rate of secondary copper rod has consistently been lower-than-expected, and the substitution effect of copper cathode has supported copper cathode consumption.

Looking ahead, although short-term supply-demand mismatches are driving premiums up, the market is expected to see a divergence between long-term contracts and spot cargoes in 2024. Given the current inventory levels, the speed of premium increases remains constrained. Additionally, as winter approaches, some cargoes from the northern regions will be forced to move south due to weakened local consumption demand. After consumption slows down, spot premiums are expected to remain weak.