Copper prices need to be guarded against excessive supply pressure

Abstract As the annual copper concentrate TC/RC negotiations approach, market attention has turned to the pricing strategies of major smelters. Chinese, Japanese, and European companies appear to be aligning on a shared objective—raising prices. According to recent data, in 2014, the cost of processing and refining copper concentrates hovered around $100 per ton, with a clear upward trend continuing into the year.

TC/RC stands for Treatment and Refining Charges, which represent the fees paid by mines to smelters. These charges reflect the quantity of copper expected to be supplied in the coming year. Recently, Chile’s Minister of Mines announced an increase in its 2013 copper production forecast, projecting output at about 5.7 million tons this year—an increase of nearly 5% from the previous year and a record high. With higher copper production anticipated in 2014, some analysts expect a rise of nearly 10%, while demand growth is slowing, potentially leading to a global copper surplus.

According to the International Copper Study Group (ICSG), the global refined copper market saw a seasonally adjusted surplus of 183,000 tons in the first half of the year. This surplus coincided with a decline in copper inventories held in bonded warehouses in Shanghai, indicating a shift from hidden stocks to more liquid ones. However, in the spot market, premiums for copper in Europe, China’s bonded warehouses, and Shanghai trade remain relatively stable, with some periods even showing slight increases. No significant signs of oversupply have been observed. The price declines are largely driven by speculative expectations rather than actual supply pressures. If the surplus were as large as reported, it's possible that this copper would re-enter "easy-to-enter" warehouses or other "black holes," reducing the perceived pressure on the market, even if the surplus still exists.

As copper mine production surges in the future, the supply chain may return to balance, prompting smelters to expand capacity due to rising TC/RC costs. When this balance is disrupted, copper prices could face renewed upward pressure. However, such a scenario is unlikely to occur by the end of 2013 and should be closely monitored.

Currently, copper prices are caught in a tough situation. Several key factors support the market: First, China’s economic recovery is evident, with strong performance across various indicators. Second, long-term premiums for refined copper are expected to rise sharply in 2014, directly pushing up spot prices. Third, the market remains confident that the U.S. debt ceiling issue will be resolved without major disruptions.

In the short term, there are no new triggers that could significantly impact the market. Therefore, prices are likely to continue fluctuating while waiting for clarity on the U.S. debt ceiling.