Chinese copper concentrate price coefficient has little room to rise in 2021

Asian Metal: Mr. Zhang, thank you for accepting Asian Metal's interview. Would you please give us a brief introduction of your company?

Mr. Zhang: Founded in 2012, China National Gold Group International Trading Co., Ltd. is a copper-trading subsidiary of China Gold. We are mainly engaged in the sales of products (other than gold) produced by China Gold, including copper concentrate and copper cathode and a small amount of silver, zinc and other metals. In addition, we also make some marketized trading in copper industrial chain. We sell copper concentrate mainly from China Gold's Wushan Copper Mine in Inner Mongolia, Jiama Copper Mine in Tibet and Sanxin Gold-Copper Mine in Hubei, with annual sales of about 140,000 metal tons. We are also in charge of the partial sales of copper cathode produced by Zhongyuan Gold Smelter to eastern China as well as some marketized trading of the material, both are physical trading with major end consumers such as copper rod and copper tube producers, and the current annual trade volume reaches nearly 150,000t. What's more, China Gold also owns copper cathode project in Congo, and we are currently in business negotiations with the project operator to sell its copper cathode to China in the future.

Asian Metal: What is the current situation for copper concentrate market in China? Do you think there is still room for the price coefficient of domestic copper concentrate to rise, following the release of new and expanded smelting capacity over the past few years?

Mr. Zhang: Most copper mines in China are small in size. There are just a few large mines with capacity higher than 70,000 metal tons per annum and all of them are state-owned or directly under the control of the central government, which means limited market-based circulation. Most small-to-medium mines with annual capacity less than 20,000 metal tons have relatively high marketization level but most of them would lock in the annual price coefficient early in the year as they have relatively stable downstream smelter clients. Unless there are significant changes, they normally won't adjust the coefficient. At the same time, most mining companies prefer a safe and stable sales channel. Smelters will suffer heavy losses if the price coefficients are set based on the current treatment charges (TCs) for imported ore, which is not a good thing for mines either in the long run. In conclusion, I believe there is not much room for increase in the price coefficient for domestic copper concentrate this year, and I reckon the overall rise would be 0.5-1 percentage point at most against the current level. Generally speaking, smelters will mark up the price coefficient if copper price goes up, but my opinion is that most smelters won't raise the coefficient any further when copper price exceeds RMB75,000/t (USD11,655/t), and the upper limit for the price coefficient of domestic copper concentrate 20%min would be somewhere between 92% and 93%.

Asian Metal: Currently, China's copper consumption is primarily driven by traditional sectors such as power grid and real estate. What do you think are the potentials and highlights for domestic end-user copper consumption in the future?

Mr. Zhang: I think the most noteworthy highlight is the new energy industry, including NEVs, PV and wind power. China's copper consumption from new energy industry is expected to grow more than 2 million tonnes per annum from the current level in the coming years, but in the short term that is still a far cry from the traditional industries such as power grid. In addition, China's consumption upgrade will lead to growing copper demand. The current copper consumption from many basic infrastructures in our country is very limited, while developed countries in Europe and America consume a large amount of copper to produce construction materials, home decoration, etc. Moreover, China's carbon neutrality goal unveiled during this year's two sessions is also worth noting, and we are also observing and studying the potential growth of domestic copper consumption in the future under the concept of carbon neutrality.

Asian Metal: How does your company make profits from trading in copper industrial chain given current market conditions? Are there any explorations and innovations for business mode?

Mr. Zhang: Apart from realizing operating profit by seeking market opportunities through the traditional way of doing business, we mainly utilize futures instruments to hedge against risks and generate profits, such as setting up a market research team to take advantage of basis, arbitrage and short-term trend based on combination of futures and spot trading. For example, we would comprehensively weigh the contract volume at hand and related cost according to our annual business objectives, to lock in the operating profit when copper price is at a temporarily high level, and reduce the exposure risk in the actual business. This operation is usually done after copper price reaches periodic peak and then inches down, and typically only part of the position is involved. At present, supply chain finance is sometimes associated with spot trading but it is defined as financing trade by SASAC and hence it is strictly prohibited. We, as a subsidiary of central government-owned company, will definitely not get involved in that business.

Asian Metal: How does your company utilize futures instrument to realize hedging and arbitrage in copper industrial chain trading?

Mr. Zhang: We use futures instrument to facilitate spot trading. The first premise is that there must be spot goods or signed spot contracts as we do not speculate in futures-only trading. The second premise is that we refuse futures-only arbitrage, “Buy Near, Sell Far” arbitrage or basis-only arbitrage. The usage of all futures instruments is based on actual spot trading, through basis arbitrage based on the combination of futures and spot trading, or the partial exposure operation under the overall hedging. In addition, we also studied options trading, but the options market in China is not very mature with relatively high cost, and over-the-counter options are prone to problems, so we didn't utilize options trading in actual business.

Asian Metal: What do you think are the key factors that will dominate copper price trend in 2021? What's your view on future copper price movement?

Mr. Zhang: I reckon that copper price will continue last year's trend in 2021, as prices for copper commodities are expected to climb up on the whole driven by the easy monetary policy and loose fiscal policy implemented by western economies led by the United States. The increase in copper price to date since the Spring Festival is much more of a combined result of bullish sentiment, sufficient liquidity and macro bullishness. However, we believe the impact from macro-level positive expectations is fading away, as the $1.9 trillion U.S. bailout package and the $2 trillion U.S. fiscal stimulus plan didn't cause too much of a stir in the market. We believe that it depends on the changes in end-user demand. If domestic copper consumption keeps recovering in May and June, coupled with macro bullishness, copper prices are likely to rise and exceed the historic high of RMB84,600/t and LME copper prices might surpass USD12,000/t. As for when this round of rally will end, I think the turning point will occur when the Federal Reserve substantially raises interest rates.

Asian Metal: Thanks again for accepting our interview, and we wish your company a prosperous future!

Mr. Zhang: Thank you!