Continued Destocking for Nearly Two Months: Is the Spot Premium Realised? [SMM Analysis]

Since H1 this year, domestic spot premiums have been under pressure due to continued stockpiling at the beginning of the year and mediocre consumption. With the surge in copper prices, the SHFE copper contracts for near and distant months have shown a significant contango structure. As a result, spot premiums/discounts have exhibited cyclical fluctuations in H1, gradually moving towards premiums after the contracts change, with only slight premiums before delivery. However, since the continued drop in Shanghai social inventories began in June, this cycle seems to be broken. The following is a detailed analysis.

Supply side, the proportion of SHFE warrants to SMM inventories remained at a historical high, and holders still faced significant destocking pressure. With the narrowing contango structure of SHFE copper, traders currently have a high demand for shipments. Additionally, with a slight improvement in domestic premiums, importers quickly pull bonded zone inventories into the domestic market, slowing the pace of inventory destocking.

Demand side, although market sentiment has been mediocre after the decline in copper prices, feedback from processing material enterprises during the survey on order growth has been mixed. This could be due to intense competition in the existing market under continuous domestic expansion. Overall data shows that since June, daily outflows from warehouses in Shanghai have approached the peak season levels of previous years. In June and July, the production of domestic smelters remained above the million-mt mark. With the year-on-year significant increase in imported copper cathode, current social inventory destocking proves that consumption is indeed supported.

Looking ahead, last week’s simultaneous destocking of domestic and bonded warehouse inventories provided confidence for holders to hold prices firm. After a long period of stability, spot premiums have finally been realised. However, as mentioned earlier, the destocking pressure from the large accumulation of warrants and social inventory in H1 remained significant, making it difficult for the SHFE copper structure and spot premiums to change significantly in the short term. This week, the SHFE 2408 contract will enter delivery. Currently, the price spread between the 2409 and 2410 contracts fluctuates at a contango of 140-110 yuan/mt. It is expected that after delivery, spot premiums will quickly be realised.