London 01/09/2016 - Codelco's annual copper premium is set to fall to its lowest for at least seven years in 2017 because Chinese buyers will need to see a significant reduction in the benchmark to renew their long-term supply contracts rather than move to the spot market, sources said.
The Chilean miner set annual premiums well above spot levels in the past two years but Chinese customers may not accept such a scenario this year. The premium for 2015 was at $133 per tonne on top of LME cash prices when in fact spot premiums spent the year below $100 and at $98 for 2016 when premiums have averaged nearer to $50 on a CIF Shanghai basis.
"Miners and smelters have to realise that premiums are unrealistic and have to accept that the market is not where it used to be," a trader in Europe said.
The bearish factors have not imporved and have in fact worsened: copper demand growth has continued to slow and financing appetite has dropped further amid tighter credit availability. Supply has remained ample and China has even increased its exports in recent months, delivering unwanted copper into LME-listed warehouses in Singapore and South Korea.
The outlook for 2017 is one of surplus again so Codelco will have no other choice but to adopt a realistic approach to its copper sales campaign, even though it is struggling with negative earnings - it recorded a loss of $97 million in the first half of this year.
"There is no doubt that premiums will be lower; the question is: by how much?" a source close to Codelco said, adding that there was "no set floor".
Market participants expect Codelco to table an offer between $70 and $85 per tonne for 2017, which, if accepted, would mark a 23-percent annual fall and the lowest level since at least 2009 when the premium stood at $75. But many Chinese buyers have already stated that they will not book any long-term contract at premiums above $60-70.
"I think Codelco will try at $70 and won't get any takers there," a European trader also said.
"Many end-users and traders don't want to book long-term contracts at all for next year because this year it's been so easy and cheap to buy on the spot," a Shanghai-based trader also commented.
Although Chinese demand may improve slightly, driven by the power and construction sectors, domestic production is also rising, helped by high treatment and refining charges (TC/RCs) and the ample availability of concentrates. This means Chinese smelters may be able to offer domestic supply contracts at more attractive premiums of $50-60 per tonne, sources suggested.
At a recent press conference, CEO Nelson Pizarro seemed well aware of the challenges his company faces - he pointed to a scenario of low copper prices and demand for a while longer.
"The situation is still extremely fragile. Nobody can think that tough times are behind us yet. 2017 is not going to be much better than 2016 and 2018 may not be either," he said last Friday.
That opens the door to possible adjustments in Codelco's sales approach for 2017, sources suggested. The company may start to sell more on the spot market in the form of tenders, for instance, or it could divert more cathodes to other regions.
"Codelco will have to come down a long way to sell anything in China - they might try to sell more in Europe and the US," the second European trader said.
That could lead to a scenario when Codelco's premium in China is lower than its benchmark for Europe, which would be a first since 2009.
Codelco may also have less cathodes to sell if supply disruptions emanate from current tough labour contract negotiations at two of its mines, Chuquicamata and El Salvador. In fact, some workers at the smaller El Salvador have today voted to go on strike from next week to demand better wages and loans despite Pizarro's recent warning that "there is no money".
(Editing by Mark Shaw)