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Daily Intelligence Briefing

Thursday, March 14, 2024

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Copper Prices Buoyed by China’s Smelters as Stockpiles of the Red Metal Are Slashed by a Third

Summary: Copper futures broke above $4.00 per pound yesterday for the first time since last July. That move followed an announcement that several of China’s largest smelters would idle some capacity to deal with a drop off in concentrate supplies and treatment charges. China is the largest global importer of copper and a major exporter of finished products utilizing copper components. 


A bounce in Beijing’s outbound trade data throughout the first two months of 2024 could signal a burgeoning rebound in Chinese factory activity, which has now contracted for five consecutive months. If that is the case, it could begin to bolster demand for refined copper – pushing up futures prices and miner shares.


Related ETF: Global X Copper Miners ETF (COPX)

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Copper prices spiked yesterday as some of China’s top copper smelters, including Jiangxi Copper, Tongling Nonferrous Metals Group, Jinchuan Group, and China Copper, agreed to initiate joint production cuts at some loss-making plants that now face short supplies of copper concentrate. Bloomberg reports that smelter maintenance could also add some further tightness to the copper market, set to peak in April and May. Copper futures’ move above the $4.00/lb threshold brought the red metal’s return in the year-to-date period to about 3.8%.


The country’s imports of copper concentrate have risen to 4.66 million tons in the first two months of the year, up 0.6% YoY, but disruptions to supply have made it more difficult and expensive to get raw supply in. This has put smelters in a predicament as their treatment and refining charges (TCs) — the amount they are paid to convert concentrate into metal – tumbled to $11.20 per tonne at the close of last week, representing a -76% drop in just two months. Per Reuters, that is the lowest level reported since Fastmarkets started publishing their weekly index of TCs in 2013.


China’s reliance on mineral-rich regions of Latin America has been growing in recent years, which is where declines in copper output have been most visible recently. MRP has specifically covered withering output prospects in Chile and Peru – the top two copper producing nations in the world. Copper output at Chile’s state-owned Codelco is likely to have fallen to a 25-year low in 2023, compounding consecutive declines across several previous years while political headwinds continue to hamper the growth of Peru’s copper industry. Further, Panama’s sprawling Cobre copper mine was shut down by the country’s Supreme Court’s in late 2023, slashing global copper production by at least -1.0% – equivalent to roughly -300,000 tonnes per year. The permanent shutdown of this mine could help swing the global copper market into a deficit this year, according to Macquarie.


China is a massive consumer of copper, serving as the destination for the majority of copper shipments around the world, as well as a major exporter of household, electronic, and transportation goods that rely on refined copper. Per the International Copper Study Group (ICSG), preliminary world refined copper balance in 2023 indicated an apparent deficit of about -87,000 tonnes, but the most recent 2024 forecast from the group suggests a significant surplus of 467,000 tonnes. This figure could be materially impacted by a slowing of Chinese smelting activity.


China’s exports rose by 7.1% YoY across the first two months of 2024, which could signal resurgent international demand for Chinese-made products and a potential end to carnage in the country’s manufacturing sector. China’s manufacturing purchasing managers’ index (PMI), compiled by the National Bureau of Statistics (NBS), fell to 49.1 in February – marking a fifth straight month of contraction in factory activity. This has likely fed through to copper prices, suppressing them for some time. A rebound in Chinese industrial might, coinciding with a drop in refined copper output, could push futures up further and benefit miner shares.


Copper stockpiles in warehouses tracked by the London Metal Exchange (LME) have fallen by more than a third since the end of 2023, declining by -58,375 tonnes. Though non-commercial positions in the CFTC’s most recent weekly Commitments of Traders (COT) report showed funds still holding a net short position in copper futures, the balance of long-short contracts has shifted from an eight-month low of roughly -32,700 in the week to February 16 to just -5,300 in the most recently reported period. Total options volume spiked on Wednesday to more than 52,000 contracts, according to exchange data cited by Bloomberg. A jump in the call skew signaled more bets on higher prices coming in. Investors can gain exposure to copper via the Global X Copper Miners ETF (COPX).


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