Chinese Smelters to Increase Exports as Short Squeeze Pushed LME Copper Prices Higher

SHANGHAI, Oct 28 (SMM) – As Europe’s largest refined zinc producer Nyrstar decided to cut output in the fourth quarter due to the soaring electricity prices in Europe and the significant increase in carbon emissions-related costs, the market concerns of inflation caused by the global energy crisis has risen sharply. And the sharp growth in the cost of industrial products will gradually be passed onto the prices.

Meanwhile, low global inventories have become the largest transaction logic in the market. LME copper saw a short squeeze. LME copper stocks have maintained a downward trend since late September, while the proportion of cancelled warrants has gradually increased, up from 26.84% on September 22 to 61.60% on October 11. The proportion of cancelled warrants on October 15 has reached 92.2%, pushing the available inventory to the lowest level since 1974. The backwardation of LME cash to the three-month contract soared to above $1,100/mt, the highest since the 1970s. At the same time, the LME three-month copper rose rapidly, up from around $9,300/mt to a maximum of $10,452.5/mt, an increase of 12.4%.

However, SMM believes that the global low inventories will be a short-term issue.

Maritime logistics and containers have been affected to varying degrees amid the global pandemic. A large number of industrial products and processed products are stranded at ports, which has led to an increase in global invisible inventory. However, with the gradual popularisation of vaccines, global shipping issues are expected to ease in Q1 next year, which will alleviate the current high invisible inventory in the market.

In the short term, the impact of domestic power rationing will be more concentrated in downstream processing companies. Operations at the several smelters that have been significantly affected by power rationing have also improved. Smelters have rushed to produce in the fourth quarter. Dongying Fangyuan will resume production. Besides, the operating rates at downstream processing plants have been low amid higher copper prices, thin profits and poor orders. The price spread between copper cathode and copper scrap has expanded after copper prices surged, incentivised large amounts of copper scrap offered into the market.

Some copper cathode rod plants cut output as copper scrap rod became desirable for downstream wire and cable plants. Domestic inventory will see the pivot in the short term due to the substitution of copper cathode by copper scrap. This, coupled with the timely offering of reserves by the SRB, will ease copper cathode shortages substantially.

The rapid rise in copper prices has also caused difficulties for domestic enterprises. The hedging risks for domestic companies have increased in the face of rising copper prices. Moreover, rising copper prices have placed greater cost pressure on mid- and downstream companies, which is contrary to the direction of the Chinese government's policy of stabilising commodity prices. In this scenario, some domestic smelters have begun to increase exports of copper to LME warehouses for delivery.

The short squeeze on LME has improved in the past two days. On October 26, the backwardation of LME cash to the three-month contract dropped from a high of $1,103.5/mt to $203.25/mt, and the LME copper prices fell to the $9,800/mt level.