Copper prices need to be guarded against excessive supply pressure

Abstract As the annual TC/RC negotiations for copper concentrates approach, the market is closely watching the price trends among major smelting companies. Chinese, Japanese, and European firms seem to be aligned in their strategy—pushing for higher prices. According to recent data, in 2014, the processing and refining costs for copper concentrates were around $100 per ton, and this figure has continued to rise sharply.

TC/RC refers to the cost that mining companies pay to smelters, reflecting the amount of copper expected to be supplied in the coming year. In a recent speech in London, Chile’s Minister of Mines announced an upward revision of the country's 2013 copper production forecast. Copper output this year is now expected to reach approximately 5.7 million tons, up from 5.53 million tons in July—an increase of nearly 5% compared to the previous year and a new record high. With increased copper mine production in 2014, there is optimism for a nearly 10% rise in output, while demand growth is slowing down, potentially leading to a larger global copper surplus.

According to the latest estimates from the International Copper Study Group (ICSG), the global refined copper market experienced a seasonally adjusted oversupply of 183,000 tons in the first half of the year. This surplus coincides with a decline in copper inventories in Shanghai's bonded warehouses, indicating a shift from hidden stocks to more visible ones. However, on the spot market, whether it's the European copper premium, the bonded warehouse premium in China, or the copper premium in Shanghai trading, all have shown relatively stable movements, with some periods even showing increases. There are no clear signs of a copper surplus in the market. The recent price drop appears to be driven more by speculative expectations than actual supply issues. If the surplus is indeed as reported, this copper may once again find its way into "easy-to-enter" warehouses or other "black holes," making the market feel less pressured, even if the surplus exists.

As copper mine production surges in the future, the supply chain is expected to stabilize, and smelters may increase capacity due to rising TC/RC costs. When this balance is eventually disrupted, copper prices could face renewed pressure. However, this scenario is unlikely to occur at the end of 2013 and should be monitored carefully.

Currently, copper prices are caught in a dilemma. Several key factors are supporting the market: First, China's economic recovery is evident, with strong data across the board. Second, long-term premiums for refined copper are expected to rise significantly in 2014, directly pushing up spot prices. Third, the market remains confident that the U.S. debt ceiling issue will be resolved smoothly.

In the short term, there are no new triggers in the market that could cause significant price swings. It is likely that the market will continue to fluctuate, waiting for a final resolution to the U.S. debt ceiling debate.