Natural Properties and Application

Copper is one of the oldest metals mankind discovered and was in use by humans as early as more than 3000 years ago.

Copper is a metal with the symbol Cu, atomic weight 63.54, specific gravity 8.92, and melting point 1083^oC. Pure copper has a light rosy or reddish color and shows a purple bronze color after copper oxide film forms on the surfaces. Copper has many valuable physical and chemical attributes.

●Both thermal and electrical conductivity are very high, second only to silver and much higher than all other metals. This attribute has made copper an important material in electronic and electrical industries.

●It has strong chemical stability and is erosion-resistant. It can be used in making various types of containers holding erosive medium, hence it’s widely used in energy, petrochemical and light industries.

●It’s highly tensile, fusible, malleable, and expandable. Pure copper can be drawn into very fine wires or laminated ito very thin copper foils. It can form into alloys with zinc, tin, lead, manganese, cobalt, nickel, aluminum, and iron etc. Such alloys are used in a variety of transmission parts and fixing parts in the mechanical metallurgical industry.

●It’s soft yet firm and colorful, which makes it a valuable building and decoration material.

The applications of copper’s major attribtes are distributed as below:

 

Attributes	Electrical conductivity	Errosion-resistence	Structural strength	Decorativeness
Application %	64%	23%	12%	1%

 

 

Market Distribution

International Market

Major Distribution of Copper Resources

Copper resources are abundant in the world. According to the 2005 U.S. Bureau of Mines statistics, the recoverable reserves of copper metal are 467 million tons in the world, while the reserve base is 937 million tons. Chile and the United States are the two countries with the most mineable copper reserves.

Geographically, there are five regions with the world’s most abundant copper:

(1) The western foot of the Andes within the territory of Peru and Chile in South America;

(2) The Los Angeles and Great Basin areas in West United States;

(3) Congo and Zambia in Africa;

(4) Republic of Kazakhstan;

(5) The eastern and central parts of Canada.
    In terms of distribution by countries, the world’s copper resources are mainly concentrated in Chile, the United States, China, Peru, Zambia, Commonwealth of Independent States (CIS), Indonesia, Poland, Mexico, Australia and Canada. Copper resources of these countries accounted for 87.2% of global copper resources, among which Chile is the world’s most copper resource-rich country, with copper reserves of about 29.98% of the world’s total reserves.

 

 

Production of Copper

Copper production was rapidly developed in the 1950s to the 1970s. The global refined copper production in 1950 was only 3.15 million tons, and was up to 7.7 million tons by 1974. But the two oil crises led to the shrinking copper consumption so that copper production has dropped significantly. In the 1990s copper production increased rapidly again. In 1999, Chile surpassed the U.S. as the world’s largest producer of refined copper. In 2006, China overtook Chile and leaped to the first in the world.

In 2007, global refined copper output reached 18.075 million tons, an increase of approximately 5.1%, while China’s refined copper output reached 3.491 million tons, an increase of 16.7 and continues to stay ahead.

(Note: 2007 data from CRU British Commodity Research Bureau)

 

Copper Consumption

Copper consumption is relatively concentrated in developed countries and regions. Western Europe is the world’s largest area in copper consumption. Since 2002 China has surpassed the United States to become the second largest market and also the largest country in copper consumption. After 2000, the growth rate of copper consumption in developing countries is much higher than that of developed countries. The proportion of copper consumption in Western Europe and the U.S. among global copper consumption is showing a decreasing trend, while Asian countries and regions (except Japan) with China as the representative has become a major growth point in copper consumption.   

In 2007 the world consumed about 18.146 million tons of refined copper, a growth of about 4.5% over 2006.
China is still the most important force in driving up copper consumption growth, with refined copper consumption in 2007 amounting to 4.621 million tons, an increase of up to 16.9%.
  (Note: 2007 data from CRU British Commodity Research Bureau)

 

The global flow of copper

Major exporting countries of copper concentrate: Chile, Peru, United States, Indonesia, Portugal, Canada, and Australia, etc.
Major importing countries of copper concentrate: China, Japan, Germany, Korea, and India, etc.
Major exporting countries of refined copper: Chile, Russia, Japan, Kazakhstan, Zambia, Peru, Australia, and Canada, etc.
Major importing countries of refined copper: China, United States, Japan, EU, South Korea, and China Taiwan, etc.

 

 

Refined Copper Output in the World’s Major Copper Producing Countries (1998-2007)

Unit: thousand tons

 

Note:

1.        Refined copper output includes electrolytic and pyrometallurgical refining of copper, production of blister copper, copper anodes and other primary raw materials, and also copper recycling from scrap metals and other similar raw materials, but excluding copper recovered by simple remelting of secondary raw materials.

2.        Source: WBMS (World Bureau of Metal Statistics). 2007 data from the CRU (UK Commodity Research Bureau).

  

Domestic Market

 Main Distribution of Copper Resources

In 2006, China achieved a major breakthrough in prospecting for copper deposits in a new round of land and resources survey, with an increase of 26.78 million tons of new copper resources. As of now, China’s total known reserves (copper) is 85.31 million tons, accounting for12.1% of the world reserve base in the same year, ranking the third after Chile and the United States.

Among China’s most well-known large-scale copper mines are Yulong Copper Mine and Qulong Copper Mine in Tibet, Dexing Copper Mine in Jiangxi, and Pulang Copper Mine and Yangla Copper Mine in Yunnan, both of which were newly discovered in recent years.   

 

(Note: China’s data from the January 24, 2007 report from the China Geological Survey Bureau)
Since 2000, China’s production of copper concentrate (calculated based on the amount of copper) has been hovering around 56-65 million tonnes, but there is a rapid growth in copper concentrate production in recent years, which reached 951,000 tons in 2007, a growth of 8.93% compared to 2006.
(Note: Data from Antaike)

 

 Copper Production

China is the world’s largest producer of refined copper, with refined copper production amounting to 3.491 million tons in 2007, accounting for 19.31% of world production. Domestic copper concentrate production cannot meet demand and import in large quantities is needed.

 

Copper Production of Major Domestic Producers (unit: million tons)

 

   (Note: 2006 and 2007 Data from Antaike)

 

Copper Consumption

Since the 1990s, China’s copper consumption has entered a period of rapid development. The main driver of the rapid growth of copper consumption is the fast development of the national economy and large-scale infrastructure construction. The strategic shift of manufacturing from developed countries to China and other developing countries is also an important factor of China’s copper consumption growth.

Over the past 20 years, the proportion of China’s refined copper consumption in world consumption is constantly rising. In 2007, China consumed 4.621 million tons of refined copper, accounting for as high as 25.46% of total global copper consumption.
Domestic copper consumption structure is as follows: 53% in electricity, 6% in electronics, 9% in transportation, 2% in construction, 10% oin air-conditioning, 2% in refrigerator, and 18% in all others.
(Note: Data from CRU British Commodity Research Bureau)

 

   

Import and Export of Copper

 

China is the world’s largest copper consumer and producer, while copper resources are relative short. With the recent continued transfer of international manufacturing to China, the conflict between supply and demand of copper resources has become increasingly prominent. The self-sufficiency rate of domestic copper concentrate dropped from 80% in 1995 to about 23% in 2007, and large quantities of copper concentrate are imported annually.

From the perspective of market liquidity, a larger proportion of China’s imports of copper and copper composition is raw materials, mainly including refined copper, blister copper, scrap copper and copper concentrate. Copper processing trade is taking a dominant position; China is mainly importing from the Taiwan Province of China, Chile, South Korea and Japan; foreign-invested enterprises are the main importers, and these import enterprises are mainly concentrated in the Pearl River Delta and other regions.
China’s current copper export volume is relatively small, mainly in semi-processed products. Copper processing is the dominant trade. China’s copper is mainly exported to Hong Kong, ASEAN, Korea and Japan while foreign-invested enterprises are the major exporters, which are mainly in the Yangtze River Delta and Central regions.

 

 

  Exibit:       Table of China’s Refined Copper Supply and Demand in 1991-2007

                                               Unit: ten thousand tons

Year	Output	Imports	Consumption	Exports
1991	56.00	10.12	79.00	0.43
1992	65.92	26.10	99.00	0.98
1993	73.03	25.35	99.00	0.19
1994	73.61	7.23	91.00	1.07
1995	107.97	10.21	120.00	2.57
1996	111.91	14.97	125.00	3.98
1997	117.94	8.83	107.51	7.79
1998	115.18	26.84	110.13	12.14
1999	101.13	54.77	147.00	10.3
2000	133.05	81.21	175.00	11.87
2001	142.51	95.40	208.3	5.40
2002	155.85	118.10	266.3	7.66
2003	177.22	135.73	306.51	6.44
2004	207.91	120.00	324.43	12.38
2005	258.34	122.20	366.53	14.01
2006	299.9	82.70	360.95	24.30
2007	344.10	149.37	480.94	12.59

Note: Data Source from related statistics from National Bureau of Statistics, the State General Administration of Customs, Antaike, WBMS (World Bureau of Metal Statistics)

Exhibit: Chart of China’s Refined Copper Supply and Demand in 1991-2007

Year

Chart of China’s Refined Copper Supply and Demand in 1991-2007

 

Factors Affecting Prices

Supply and Demand

 

According to principles of microeconomics, the price of a particular good declines when supply exceeds demand, and rises when the opposite is true. At the same time prices in turn affect supply and demand, that is, when prices are rising, the supply will increase while demand will decrease. Vice versa, there will be increased demand and reduced supply. Therefore, prices and supply and demand affect each other.

An important indicator of supply-demand relationship is inventory. Copper inventory is categoried as reported inventory and unreported inventory. Reported inventory, also known as “visible inventory”, refers to exchange inventories. The world’s more influential copper futures xxchanges are the London Metal Exchange (LME), the COMEX branch of New York Mercantile Exchange (NYMEX), and the Shanghai Futures Exchange (SHFE). All the three exchanges are publishing certified warehouse inventory regularly.

Unreported inventory, also known as “hidden inventory”, refers to the inventory held by worldwide manufacturers, traders and consumer business. Since these stocks are not regularly published, it is difficult to calculate, therefore it is generally measured by stock exchanges.

 

Macroeconomic situation

Copper is an important industrial raw material and its demand is closely related with the economic situation. When conomy grows, increased demand for copper drives up copper prices. During economic depression, the shrinking copper demand contributed to decline of copper prices.

In analyzing macroeconomic, there are two indicators that are very important. One is economic growth rate, or GDP growth rate, and the other is the industrial production growth rate.

 

Import and Export Policies   

 

Import and export policies, especially tariff policy, are an important means to balance domestic supply and demand by adjusting the cost of importing and exporting hence to control the import and export volume of a commodity. From January 1, 2008 on, China has implemented zero tariffs on imports of refined copper, and 5% tarrif on export of high purity refined copper. Export tax of 10% is levied on copper master alloy (the General Administration of Customs Announcement No. 79 of 2007). Both import and export taxes are reduced.

 

 

Expansion and Replacement of Copper Consumption

   
     Consumption is a direct factor affecting the price of copper, while the development of copper consumption industries is an important factor impacting consumption. For example, in the 1990s, copper pipe consumption in the construction industry increased tremendously in the developed countries, and the construction industry became the largest industry in copper consumption, thus contributing to the rise of the international copper prices in the mid-1990s. The U.S. housing starts also became one of the factors affecting copper prices. Since 2003, development of China’s real estate and power industries has greatly promoted the copper consumption growth, thus becoming one of the factors supporting copper prices. In the automotive industry, manufacturers are advocating aluminum to replace copper to reduce vehicle weight and thus copper consumption is reduced in the industry. Moreover, as technology advances, the scope of copper application continues to broaden. Copper has begun to play a role in medicine, biology, superconductivity, and environmental protection, etc. IBM has begun to substitute aluminum with copper in silicon chips, which marks the latest breakthrough of copper application in semiconductor technology. These changes will have an effect on the consumption of copper.

 

The Production Costs of Copper

     Production cost is the basis of measuring the level of commodity prices. Copper production costs include smelting costs and refining costs. Different mines adopt different methods to estimate copper production costs, the most common economic analysis is the use of “cash flow breakeven costs,” in which the cost decreases with the increase of byproduct value. After the 1990s, the cost of production shows a downward trend.   

Currently the average consolidated cash cost of pyrometallurgical copper smelting in western countries is approximately 70-75 cents per pound, and average cost of hydrometallurgical copper smelting is about 45 cents per pound. Hydrometallurgical production currently accounts for approximately 20% of total production. Domestic production costs are calculated somewhat differently from the other countries.

Issues in processing charges (TC/RC): changes in processing charges (TC/RC) reflect the changes in the game status between the copper mines and smelters in the copper industry. In recent years with the copper resources concentrating and the rapid expansion of smelting capacity, TC/RC is trending downward year by year. For example, the TC/RC signed by BHP with Jiangxi Copper and Tongling in 2008 is 47.2/4.72, an reduction of 21% as compared to the annual terms in 2007.

(Note: Data from CRU British Commodity Research Bureau)

 

Direction in Fund Trading

Although the fund industry has a long history, it has only been vigorously developinng after entering into the 1990s. Meanwhile, the extent of funds involved in commodity futures has also increased significantly. Judged from the evolution of the copper market in the recent decade, funds have played a role in fueling many of the big market rises.

Some funds are big and some small, therefore their operating practices also vary greatly. In general, the funds can be divided into two categories. One category is macro funds, such as hedge funds, with a large scale ranging from billions of dollars to as much as ten billions dollars, and is mainly put in strategic long-term investment. The other category is short-term funds, which is managed by CTA (Commodity Trading Advisors), with a smaller scale of $100 million or so, and relies on technical analysis for short-term operation, so it’s also called technical funds.

Judged from changes in the COMEX copper price and non-commercial positions (generally considered as the fund’s speculative positions), there is very strong correlation between copper price fluctuations and fund positions. And also because funds have a more profound understanding of macroeconomic fundamentals and are able to “foresee”, knowing the movements of funds also holds the key to grasping the market. The copper price trend in recent years especially since 2005 indicates that fund is the tremendous momentum behind the sharp and rapid surges in copper prices.

 

Price fluctuations of related products such as oil will also have an impact on the copper prices.

Crude oil and copper are important industrial raw materials internationally. Whether their demand is good or not best reflects how the economy is performing. So in the long term, there is relatively strong correlation between prices of oil and copper and the speed of economic growth. Because crude oil and copper are closely related with the macroeconomy, copper and oil prices demonstrate a positive correlation to a certain extent. But both just showed consistency in trend but short-term price fluctuations are not necessarily the same.

 

Exchange Rate Fluctuations

International copper transactions are generally denominated in U.S. dollars, while currently several major currencies in the world adopt a floating exchange rate system. With the official launch of the euro on January 1, 1999, the international foreign exchange market forms a balance of power among the 3 currencies: U.S. dollar, euro and yen. Since parity among these three major currencies frequently fluctuates, dollar-denominated international price of copper will be impacted by exchange rate, which is manifested in the slump of U.S. dollar against the yen in 1994-1995, the weak euro in 1999-2000 and a continuously weakening U.S. dollar in recent years.

 Based on past experience, changes in the yen and the euro exchange rates will affect the short-term fluctuations in copper prices, but will not change the general trend of the copper market. The impact of the dollar on the copper prices is increasingly intensified, and is widely regarded as one of the important drivers in the sharp rises of copper prices since 2003. However, the key factor in determining copper prices is still the fundamentals of copper supply and demand.

 

Exhibit: Copper Prices Trend (Mar 1993-Feb 2008)

Copper CU Shanghai Spot Price Physical

Copper CU LME 3M

Copper CU SHFE 3M

Price: Yuan/ton

Price: Dollar/ton

Time

Mar 1993-Feb 2008 Trend of closing copper price of SHFE in March, LME in March, and Shanghai copper spot price

 

 

 

 

 

 

 

 

 

 

 

SHFE Copper Cathodes Contract Specifications and Relevant Provisions

Copper Cathodes Contract

Contract Text

 

Product	Copper Cathodes
Contract Size	5 tons/lot
Price Quotation	(RMB)Yuan/ton
Minimum Price Fluctuation	10 Yuan/ton
Daily Price limit	Within 3% up or down of the settlement price of the previous trading day
Contract Series	Monthly contract of the recent 12 months
Trading Hours	9:00am-11:30am, 1:30pm-3:00pm (Beijing Time)
Last Trading Day	The 15th day of the spot month (If it is a public holiday, the Last Trading Day shall be the 1st business day after the holiday)
Delivery Period	the 16th to 20th of the spot month (extended to the next business day if the period falls on a public holiday)
Grade and Quality Specifications	1) Standard Product: standard copper cathode as prescribed in the National Standard of GB GB/T467-1997 for standard copper cathodes, with fineness of the main ingredient copper plus silver no less than 99.95%. 2) Substitute Product: 1. High Purity copper cathode, as prescribed in the National Standard of GB GB/T467-1997.        2. LME registered copper cathode as prescribed in BSEN 1978:1998 standard (cathode level code: Cu-CATH-1).
Delivery Venue	Certified Delivery Warehouse of the SHFE
Minimum Trade Margin	5% of contract value
Transaction Fees	no more than 0.02% of contract amount (including risk reserve)
Settlement Type	Physical Delivery
Contract Symbol	CU

 

Note:

1. From March 1^st, 2005 onwards, daily price limit for copper futures contracts is temporarily adjusted to 4%;
2. From January 1^st, 2008 onwards, trading margin for copper futures contracts is temporarily adjusted to 7% of the contract value.

 

 

 

 

 

Contract Appendix

Appendix I: registered trademarks, packaging standards and premiums Standard for SHFE copper cathode

 

Note: Premium is 110 Yuan/ton

 

Appendix II: List of Copper Cathode registered with LME and Certified by SHFE for Delivery

 

Country	Designation	Country	Designation	Country	Designation
Austria	BRX	China	GUIYE	The Philippines	PASAR
Belgium	OLEN		TG
	SME		JINTUN	Poland	HMG-B
Brazil	CbM		TIE  FENG		HMG-S
Canada	FKA	Finland	OKM		HML
	NORANDA	Indonesia	GRESIK	South Africa	PMC
	ORC	Japan	DOWA	Spain	ERCOSA
Chile	ABRA		HM		FMS
	AE		MITSUBISHI	Sweden	BK
	AE SX EW		MITSUI
	MB		OSR	United States	ATR
	MV		SR		CB*CC
	CCC		SUMIKO N		CTB
	cCc-SX-EW		SUMIKO T		KUC
	CCC-SBL		TAMANO		CMMC ER
	CDA	Korea	ONSAN		P*D
	CMCC		ONSAN Ⅱ		RAY
	ENM	Norway	FHG	Zambia	MCM
	ESOX	Oman	OMCO		REC
	MIC-P	Peru	SMCV
	MIC-T		SPCC-ILO
	ZALDIVAR		SPCC-SXEW

 

Appendix III: Certified Delivery Warehouses of SHFE