Xu Hongping: Copper outlook for 2015 pessimistic due to weak copper fundamentals
----Interview with Xu Hongping, Senior Researcher at China Merchants Futures
China Merchants Futures Co., Ltd. is a wholly-owned subsidiary of China Merchants Securities Co., Ltd., with registered capital of RMB630 million. It is the first approved wholly-owned futures brokerage company and has transactions settlement membership of Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange and China Financial Futures Exchange. The company can act as an agent for all varieties of futures trading in China's futures markets.
Asian Metal: Crude oil prices have continued to move down recently, and copper prices are under pressure. What are your thoughts about the direction of the US dollar?
Xu: We hold pessimistic attitudes towards crude oil prices, which have shown little sign they will stop declining in the short term. Crude oil prices account for 30-40% of the production costs of copper. Crude oil prices continued to decline, and copper prices followed suit, dropping below USD6,300/t. The sharp declines in copper price do not lie in oversupply, but in the declining crude oil prices. And some copper concentrate producers continued to reduce costs given the decreasing crude oil prices, so the production costs of copper also took a downward turn. Crude oil prices are sure to impact copper prices in the future, but there is little possibility of leading copper prices dropping sharply. We think crude oil prices will not drop below USD30-40 per barrel; however, they will not go up significantly in the near future.
Asian Metal: Domestic and overseas banks have tightened their lending policies since the Qingdao scandals, which directly resulted in financial pressure on some domestic downstream consumers. What impact do you think tightening credit will have on copper demand?
Xu: The tighter credit policies of banks have had some impact on physical demand for copper, but the impact has not been big. In my opinion, they have had more of an impact on copper financing. From the point of view of issuing credit and other banks’ policies, if downstream copper consumers have genuine orders, banks will grant them letters of credit. For example, some traders import refined copper to generate financing for the real estate industry and here banks will hold back the letter of credit. However, if some enterprises apply for letters of credit for genuine orders, banks will supply them with the letter of credit. For instance, some smelters apply for a letter of credit in order to purchase raw materials, and banks will provide them with letters of credit. Since last year, demand from copper financing has continued to shrink and there is no inevitable relationship with the tightening policies of the banks, rather it is due to the unfavorable arbitrage window between Shanghai and London.
Asian Metal: Recently, copper prices have declined to RMB40,000/t (USD6,536/t). Although the treatment charges for copper concentrate are constantly going up, copper prices continue to drop. In this case, will domestic copper refineries still remain active in producing copper?
Xu: The comprehensive costs of using copper concentrate to produce copper are RMB4,000-5,000/t (USD654-817/t) and the treatment charges for copper concentrate are higher than RMB5,000/t (USD817/t). Although copper prices have continued to go down, they are still far from reaching the production costs of copper, so the enthusiasm for production in domestic refineries is still high. Due to the decline in copper prices, a few copper refineries are reluctant to sell the metal. As far as we know, this may have happened for two reasons. On the one hand, those refineries have not hedged for the copper. On the other hand, the refineries are holding too much raw material on hand. As copper prices have declined sharply, the costs of stocking the materials have increased. As a result, they are unwilling to release copper on the back of declining copper prices. According to our statistics, the operation rate in domestic main copper refineries is about 72%, down from 73-77% in previous years. There are two main reasons for the low operating rate. One is the reduced production of some small copper refineries, and the other is a result of the shortage of copper scrap. As the European and the US economies slow down, the supply of copper scrap reduces and domestic refineries with a total capacity of about 4 million tonnes which import copper scrap as raw materials are faced with a shortage of materials. As a result, the operating rate of these refineries is as low as 50%. However, in the case of some refineries, including Jiangxi Copper Co., Ltd and Tongling Nonferrous Metals Group Co., Ltd, which are using copper concentrate to produce refined copper with more complete smelting and refining facilities, their operating rate has stayed at 100%.
Asian Metal: According to a notification released by the Ministry of Finance on January 1, 2015, the export rebate rate for copper bars, rods and products will reach 9%. Meanwhile, the export rebate rate for copper foil will go up from 13% to 17%. Some participants anticipate that these measures may improve domestic demand for refined copper, what is your opinion on the policy?
Xu: In my opinion, the policy may stimulate exports to some extent, but the increase in export volume will depend on true demand from the domestic and overseas markets, as well as the prices of the same products at home and abroad. As the arbitrage window between Shanghai and London continues to go up these days, it is not favorable for exporting these products. In the event, this measure may have a limited influence on copper demand. According to some institutions, the policy may stimulate another 100,000t of copper exports, but the influence is not big for China, which is facing a copper oversupply situation. In the event, we think the policy will improve the demand for copper to some extent, but the room for increase will be limited.
Asian Metal: Global supply of copper ore is abundant in 2015. What’s more, many copper ore projects which are planned to come into production over the coming years. According to statistics from the British Commodity Research Institute, global copper ore production will be 19 million tonnes in 2015, up by 1 million tonnes with the rate of increase 5.7% year-on-year; growth in 2016 will be 5.1%. Will the overproduction of copper ore directly lead to an excess of refined copper, and is there any bottleneck between them?
Xu: As far as we know, there were some bottlenecks in domestic smelting capacity in 2014. Most domestic copper refineries are equipped with smelting capacity and we can see that the smelting capacity of domestic refineries is inadequate. However, with some new smelting capacity coming on stream in the second half of 2014, domestic smelting capacity has improved. In addition, some small smelting companies are willing to process copper ore for large domestic refineries, such as Jiangxi Copper Co., Ltd., Hubei Daye Nonferrous Metals Group and Yunnan Copper Co., Ltd., which has led to a rapid growth in domestic smelting capacity in the past year. As far as we know, the domestic smelting bottleneck was broken in October last year. In that case, the production growth rate of domestic smelters in 2015 will be greater than imagined and refined copper production will increase sharply following the significant increase in copper concentrate.
Asian Metal: As the copper fundamentals are weak, some market participants hold a pessimistic attitude towards copper prices, what is your opinion on the copper price trend?
Xu: We are also taking a pessimistic attitude towards copper prices in 2015. Although copper prices are seeing narrower falls currently, there is still no sign the decline has been halted. Copper prices may continue to decline to RMB35,000/t (USD5,719/t) and are likely to rebound to RMB48,000/t (USD7,843/t) in the long run. Furthermore, if the supply of copper continues to increase and the State Reserve Bureau stops purchasing copper, copper prices may continue to drop, but the room for decline is limited. The State Grid Corporation of China is planning to increase investment by 9% in 2015, but mainly on middle-high voltage wire. However, only low voltage wires consume mainly copper. Therefore, investments by the State Grid Corporation of China may offer little support to copper demand. Copper demand in 2015 will mainly depend on the real estate industry. For the moment, we think it is difficult to increase investment in real estate and development within the real estate industry is expected to maintain its present status.
