Singapore 30/08/2016 - Opinion pieces are the views of the author: they do not represent the views of FastMarkets
Singapore 30/08/2016 - Major listed Chinese copper smelters have started filing their half-year financial reports and, judging from the production numbers, a drop in domestic refined copper metal output for the rest of the year is unlikely.
Jiangxi Copper's first-half copper cathode production rose 3.1 percent year-on-year to 599,800 tonnes while Yunnan Copper Co's refined copper output at 277,809 tonnes was up 15.1 percent although Tongling Nonferrous Metals Group's production fell 4.7 percent year-on-year to 632,200 tonnes.
The three companies are among the 10 Chinese copper smelters that pledged in December last year to cut copper cathode by a combined 350,000 tonnes in 2016 - the others were Jinchuan Group, Daye Nonferrous Metals, Zhongtiaoshan Nonferrous Metals Group, Bayin Nonferrous Group, Yantai Guorun Copper, China Gold and Yanggu Xiangguang Copper.
These 10 smelters will still reach their goal of cutting output this year, Xu Changning, an official at Tongling Nonferrous' commercial department, reaffirmed in March this year. Tongling itself is looking to cut output by 3.8 percent to 1.26 million tonnes this year.
Even so, production by smelters outside this group would probably make up for the shortfall, Xu conceded. And to an extent he has been proved right.
Zijin Mining announced on Monday that its refined copper production rose 48.5 percent to 198,947 tonnes in the first six months, of which 154,916 tonnes were from Zijin Copper. Output from its subsidiary rose 19 percent year-on-year.
Another producer, Xinjiang Xinxin Mining Industry, said last week that first-half copper cathode output at its its Fukang refinery climbed 7.8 percent to 5,036 tonnes. It has lifted its full-year output guidance to 12,485 tonnes from its March forecast of 10,000 tonnes.
If Chinese data is anything to go by, Chinese refined copper production climbed 7.9 percent year-on-year to 4.75 million tonnes in the first seven months of this year, according to the National Bureau of Statistics.
But could the first-half production increases by Jiangxi Copper and Yunnan Copper mean that they are planning major cuts in the second half of the year to meet their commitment? This seems very unlikely.
Spot copper treatment and refining charges (TC/RCs) to smelters were last heard at $100-105 per tonne/10-10.5 cents per pound in mid-August - a level that has been maintained since late in June after they hit $100/10 cents late in May, according to FastMarkets' assessments.
Current TCs are profitable for smelters - and with around $80-85/8-8.5 cents seen as the minimum level that will keep Chinese smelters happy, there seems to be little incentive for Chinese producers to cut output.
And then there is that recent huge outflow of copper stocks to LME-registered warehouses in Asia. Much is said to be from smelters with tolling arrangements and traders shipping material out of the Chinese bonded zone, which suggests that smelters have found another outlet for their production.
In fact, word in the market is that one of the 10 smelters that pledged to cut output is responsible for much of the exports.
Copper prices on the Shanghai Futures Exchange have come under pressure since mid-July on a combination of weak demand and oversupply. The most active copper contract on the Shanghai Futures Exchange fell to a two-month low of 36,050 yuan per tonne last week.
With the most active SHFE October copper contract closing at 36,260 yuan on Tuesday, the market is still some way off the low of 33,230 yuan seen in November last year, which prompted the production-cut announcement in December.
Should the market face another collapse in copper prices, it would be no surprise if there is a a new output-cut announcement. But the market may need more convincing this time round.
(Editing by Mark Shaw)