Shanghai Securities News: Copper Futures Price Has Become Spot Trade Pricing Benchmark

Updated on: August 7, 2017

Reported by Song Weiping, Journalist from Shanghai Securities News

In a torrid day of the midsummer, journalist of Shanghai Securities News became a member of 2017’ Phase II Nonferrous Metals (Copper) Industry Training Delegation of Shanghai Futures Exchange (SHFE) and paid a visit to Tongling City, Anhui Province. But journalist did not have any impression on “Chinese Bronze Hub and Contemporary Copper Base”. A taxi driver told journalist that “There is no copper mine in operation up to now, as all copper mines are nearly exhausted”.

This argument was confirmed in journalist’s interview. According to Xu Changning (Senior Economist of Nonferrous Business Department of Tongling Nonferrous Metals Group), raw materials of Tongling Nonferrous Metals Group basically rely on imports, and self-produced copper accounts for less than 5%. External dependence of resources exceeds 95%.

However, this does not undermine leading position of Tongling Nonferrous Metals Group in the industry. According to corporate announcement, copper smelting capacity of Tongling Nonferrous Metals Group ranks first in China and ranks second in the world. In 2016, its annual output of cathode copper reached 1.2979 million tons, which ranked first in China.

All along, the trend of copper is a wonderful prognosticator of the macroeconomy, which is widely known as “Dr. Copper” in the industry. In the context of cyclical themes in full swing since 2017’ YTD, upward trend of “Dr. Copper” is remarkably slower than that of steel, coal and other black commodities.

According to the statistics of WebStock, Shanghai Copper Futures Index witnessed a mere increase by only 11.31% since 2017, which significantly lagged behind Rebar Index (35.53%) and Zhengzhou Commodity Exchange (CZCE) Coal Index (16.80%). As for capital market, SWS Industry Index also showed that Steel Index and Coal Mining Index had risen by 26.86% and 15.46%, respectively, while Copper Index rose by only 9.33%.

Does “Dr. Copper” fail or get poised to soar up? Discovery tour of “Dr. Copper” set out from Jinguan Copper Co., Ltd (a subsidiary of Tongling Nonferrous Metals Group) in Tongling Circular Economy Industry Experiment Park.

New Consumption Hotspots Push up the Boom of Copper Industry

The physical distance from the refinement workshop to the electrolytic workshop of Jinguan Copper Co., Ltd is less than 100 meters, but anode copper changes into cathode copper within both two workshops. In the background of noisy operations, Chen Ling (Purchasing Management Director of Jinguan Copper Co., Ltd) raised the voice and told journalist: “Every day, nearly 1,500 tons of cathode copper are produced by this workshop. Production never halts even if the whole plant overhaul. This workshop runs round the clock and all year round.

Journalist found few workers in the huge workshop, as the entire production line was basically controlled by robots. Green flames of furnace and busy loading and unloading truck fleets outside the gate reminded all visitors----This is a world-class copper smelting base.

“Cathode copper enjoys brisk sale. Except thousands of tons of inventory for circulation, there is basically no backlog inventory in our plant”, Chen Ling expressed that 400,000 tons of electrolytic copper flew into the global market every year.

According to the presentation, consumption volume of copper foil, strip metal and copper pipe was significantly higher than that of copper rod, among which copper foil was the greatest hotspot. Yin Dawei (Deputy General Manger of Tongguan Copper Foil Co., Ltd affiliated to Tongling Nonferrous Metals Group) told journalist that the in the first half of 2017, Tongguan Copper Foil Co., Ltd realized net profit of RMB204 million, which was 7-8 times net profit during the same period of 2016.

“In order to satisfy the strong demand for copper foil, Tongguan Copper Foil Co., Ltd is building the third production base in Tongling, and will accelerate the construction of a project with annual output of 20,000 tons of high-precision electronic copper foil”, Yin Dawei says. According to Yin’s introduction, Tongguan Copper Foil Co., Ltd has two production bases in Hefei and Chizhou, with annual production capacity of 30,000 tons of high-precision electronic copper foil in various types (including annual lithium battery production capacity of 7,500 tons). Copper foil manufacturing scale of Tongling Nonferrous Metals Group ranks first among all domestic enterprises.

As shown in just-released performance forecast of semi-annual report of listed company, in the first half of 2017, Tongling Nonferrous Metals Group saw net profit attributable to shareholders of listed company rise from 376% to 419% year on year. At the same time, performance of Jiangxi Copper Group also increased by 60%-80% year on year; performance of Yunnan Copper Group soared up from 925.84% to 1205.62% year on year; expected performance of Chengtun Mining Group will increase by 300%-350% year on year.

In the opinion of insiders, significant increase in corporate performance of the industry was not only closely related to the upside of commodity prices in nonferrous sector, but also heralded that mid/long-term market demand for copper consumption would continue to rise from another perspective.

According to the latest report of Antaike, China’s copper consumption is mainly dominated by power industry (with a share of about 50%), followed by air-conditioning refrigeration industry (with a share of 15% in 2016) and such major industries as building, transportation and electronics (with shares ranging from 7% to 10%). Interestingly, some new consumption growth points are taking shape.

Explosion of the new energy automotive industry is the reason behind brisk sale of copper foil. Respondents generally believe that in the field of transportation, new energy automotives will drive consumption of copper in increasingly significant manner. At present, pure electric automotives (cars) consume 83 kg/vehicle on average, while the electric buses consume far more copper than cars. According to China’s plan, by 2020, there will be cumulative output of 5 million new energy automotives, 12,000 charging stations and 4.5 million charging piles, which will bring about long-term stable demands for copper-related products.

Zhu Yun (External Affairs Director of International Copper Association) says: “In 2017, the global electric automotives and electric buses will see copper consumption of 185,000 tons, which will skyrocket to 1.74 million tons by 2027”.

In addition to new energy automotives, air conditioning market, which scales up together with hot weather, is also a large copper consumer. According to Zhu Yun, air-conditioning sales volume has exceeded more than 70 million units since 2017, significantly surpassing the expected 50 million units. It is expected that domestic air-conditioning sales volume will exceed 90 million units in 2017, which implies copper consumption will grow further in air conditioning sector.

In the opinion of He Xiaohui (Senior Analyst for Copper Market in Antaike), the future power industry will continue to be the largest growth engine of copper consumption. Backed up by new urbanization, distribution network transformation, new energy vehicle and charging pile construction, China’s copper consumption will grow steadily in future, which is expected to usher in the peak of refined copper consumption ten years later. On the supply side, due to few large-scale copper projects under construction, China’s copper production growth slows down, which is expected to see annual output of 1.65 million tons and 1.72 million tons in 2017 and 2018, respectively. With the slowdown in production capacity expansion, the average growth rate of China’s crude copper output and refined copper output will slow down to single digit from 2017 to 2020. For this reason, central pivot of copper price is expected to move up.

Copper Futures Price Has Become Spot Trade Pricing Benchmark

As one of the earliest futures varieties, copper (CU) has been listed and traded for more than 20 years. As found in field research, employees of Tongling Nonferrous Metals Group take delight in talking about lofty status of “Tongguan” Brand Electrolytic Copper as “Registered Copper” and “Premium Copper” in SHFE.

“This is the endorsement for product quality. With the gradually increasing impact of SHFE copper futures, sales volume of ‘Tongguan’ Brand Copper will be more assured”, Chen Ling said.

As proved by the data of China Futures Association, in the first 7 months of 2017, the cumulative turnover of Shanghai Copper Futures accounted for 6.96% of the national total, and ranked among top five futures varieties. The data of SHFE also proved that from January to June 2017, monthly spot price for contractual clearing and delivery of Shanghai Copper Futures was RMB46,645/ton, which was slightly lower than the average price of Shanghai Copper Spot Market during the same period (RMB46,748/ton). In the same period, designated delivery warehouse capacity of Shanghai Copper Futures reached 1.2368 million tons, up 3.34% over that in the late 2016.

Relevant persons of SHFE comment that in the first half of 2017, customer engagement, hedging efficiency and ratio always kept high levels in copper futures industry. Price of Shanghai Copper Futures are highly related to domestic spot price, which fully mirrors change trend of domestic supply and demand, and serves as the domestic spot trade pricing benchmark.

Tongling Nonferrous Metals Group benefits a lot from futures market. According to Xu Changning, since October 2003, copper price rose from RMB16,000/ton to the peak of RMB85,000/ton. Ever-increasing copper prices have enormous impacts on copper enterprises and especially copper manufacturers. Tongling Nonferrous Metals Group especially sets up Futures Work Leading Group, and achieves the goal of stable production and operation of nonferrous products through hedging on the futures market and fixation of profits and risks.

According to announcement of Tongling Nonferrous Metals Group, in the first quarter of 2017, it totally invested RMB153.64 million into funds to be engaged in hedging business of SHFE and London Metal Exchange (LME), accounting for 9.39% of net asset ratio at the end of the reporting period. Tongling Nonferrous Metals Group also realized investment income of RMB9.4508 million. At the same time, Tongling Nonferrous Metals Group realized satisfying investment income of RMB6.6968 million, RMB2.3687 million and RMB3.8668 million from hedging business of Gold, Silver and Zinc Futures at SHFE, respectively.

“At present, enterprises along the whole industry chain basically adopt futures pricing, carry out transactions through the futures premium/discount mode. Therefore, copper spot price and futures price closely interact and seldom deviate”, Xu Changning said. He also called for the listing of copper options at SHFE as soon as possible, and expected that a wider range of risk management instruments could be available for enterprises along industry chain.

Thousand years ago, famous poet Li Bai spoke highly of Tongling City with a verse: “Sounds of copper mines and scorching furnaces reverberate through the skies. A legend prevails that Yellow Emperor cast tripod in Jingshan Mountain”. This verse vividly demonstrates the historical boom of Tongling thanks to copper. Tongling people believe copper futures should be utilized to support Tongling’s copper industry and even Chinese copper industry to march towards the whole world.