Benchmark’s key copper insights from LME Asia Week 2024

Benchmark’s copper team attended LME Asia Week in Hong Kong last week, where discussions carried a note of cautious optimism for China’s copper demand. Below we share the key takeaways from the event:

1) Despite pressure from extremely low spot treatment and refining charges (TC/RCs), Chinese smelters maintain strong output

With spot treatment and refining charges (TC/RCs) to Chinese smelters currently trading near record lows of $0/0¢, Benchmark estimates most smelters in China are loss-making, in spite of improved by-product and free metal credits in recent months.

In response to the above, in March, the Chinese smelting industry proposed production cuts of 5-10%; however, Benchmark has found limited evidence of any cuts materialising thus far.

On the contrary, January-May refined copper production in China grew by around 5% year-on-year, supported by inflows of price-responsive scrap feed in conjunction with pressure from local governments to maintain high operating rates in order to support economic targets.

Benchmark projects sub-breakeven levels of spot TC/RCs to prevail into the second half of this year and through to 2025.

With China’s state-owned smelters seemingly willing to operate at a loss, smelter closures outside of China look increasingly inevitable, especially once 2024 long-term supply contracts that were settled at $80/8¢ roll off.

In fact, mid-year long-term contract negotiations between Chinese smelters and Chile’s Antofagasta Minerals wrapped up last week, settling at $23.25/2.325¢ – their lowest level in the last decade and suggesting that the market may see a record low annual benchmark TC/RC for 2025.

2) Scrap supply boom is set to fade in early H2, which will slow, but not stall, growth in China’s domestic refined copper supply

Copper prices rallied to all-time highs in May, spurring a wave of scrap copper supply to enter the market. China’s year-to-date scrap imports (on an estimated copper content basis) are up by 20% year-on-year.

Benchmark confirmed that the majority of this incremental copper scrap supply has flowed to Chinese smelters, supporting growth in refined copper production in recent months.

However, with copper prices now sitting around 10% below their May peak, scrap merchants are proving less willing to supply additional units to the market, particularly as their inventories have been drawn down considerably in recent months.

According to industry sources, smelters are yet to consume all of the anode produced from scrap in recent months, which should support strong refined copper production for another 1-2 months.

As excess scrap copper supply fades in Q3, raw material supply is set to tighten. Benchmark now projects the growth rate of refined copper production to slow slightly over the second half of the year to around 2.3% year-on-year. The annual growth rate of copper production is now forecast to be around 3.5%.

3) Counter-seasonal stock-build in Q2 creates cause for concern over demand, but sentiment cautiously optimistic for H2 due to robust end-use demand

While China’s refined copper supply turned out to be stronger than expected in Q2 – driven by robust domestic refined copper production coupled with strong imports from the DRC and Russia – China’s consumption growth was considerably weaker than expected.

Price-sensitive fabricators baulked at high copper prices and reduced restocking activity and plant utilisation during what is traditionally the seasonal peak for demand in China. The result was a counter-seasonal stock-build in Q2 and record exports of refined metal from China in May.

According to reports, high prices also contributed to some substitution of copper for aluminium, allegedly in the medium voltage distribution network, as well as in electric vehicles and renewable energy generation. Although Benchmark has found little supporting evidence for this, many market participants noted that reducing copper intensity is becoming a growing priority across end-use segments.

Despite short-term pressures, end-use demand indicators are supportive of a pick-up in pent-up demand in the second half of the year: electric vehicle sales are up 32% year-on-year, while solar power installations and investment in grid infrastructure have increased 29% and 22% year-on-year, respectively.

From the perspective of the physical market, market participants noted that semis plants have gradually started to restock in recent weeks after prices fell by around 10% from their peak in May.

4) The construction sector remains a major headwind for H2, but a further stimulus injection could be around the corner

China’s struggling construction sector, which accounts for around 20% of end-use demand, looks set to be a major headwind for domestic copper demand in the second half of the year, with year-to-date floor space completions are down by 20% year-on-year.

There is, however, a growing sense of confidence that the housing sector is close to bottoming out due to support from government stimulus. The market is also eagerly awaiting China’s Third Plenum Session later this month, where additional economic stimulus measures are widely expected to be announced.

To receive our latest Copper coverage direct to your inbox simply register your details using the below form: