German copper producer Aurubis has just rung the bell on the start of the “mating season”, the annual negotiation of term contracts for shipments in the following year.
It has announced it will be reducing its copper cathode premium from $110 per tonne over LME cash metal this year to $92 next year.
Aurubis’ preemptive move will raise expectations of a similar-sized reduction in the annual premium from Chile’s Codelco, the world’s largest producer. Its European premium has been higher than that of Aurubis in both 2014 and 2015 at $112 per tonne.
The case for cutting copper premiums seems obvious. Everyone’s worried about the state of demand, particularly in China, which accounts for around 45 percent of global copper usage.
The price itself looks wobbly. Currently trading around $5,250 per tonne, basis LME three-month metal, it is already down by around 16 percent so far this year with plenty of bears calling for lower prices still.
But copper has a habit of confounding the consensus view and Aurubis may have wished it had stayed its hand until it saw the latest forecasts from the International Copper Study Group (ICSG).
The group has slashed its April forecast for a 364,000-tonne surplus this year to just 41,000 tonnes. And rather than expecting another 228,000-tonne surplus next year, it is now projecting a 127,000-tonne supply deficit.
So what’s changed since the ICSG last met in April?
Well, pretty much everything, it seems. Or as the group puts it, “the revisions reflect substantial changes in market conditions since April 2015.”
The slowdown in China is folded into a major downwards revision of the ICSG’s estimate of global demand this year from growth of 0.6 percent to a 1.2-percent contraction.
“Apparent usage” is expected to be flat in China. “Apparent usage” is a calculation based on Chinese production, changes in visible stocks and net imports.
Real usage is a different thing altogether and one that is extremely hard to calculate. But the ICSG notes that “underlying ‘real’ demand growth in China is estimated by others at around 3-4 percent”, down from a figure of 4.5-5.0 percent used back in April.
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