China relies on imports for copper resources; profit margins being continuously squeezed
Summary: Due to high inventories and excessive global copper supply, copper prices will remain in downturn for a long time. However, after the beginning of May, the copper market ushered in the hottest season of consumption; copper smelting enterprises started operation significantly; spot consumptions increased; copper prices will have a seasonal rise.
Copper ores and their concentrates are the main raw materials of metallurgical industry. China is the world's largest consumer and importer of copper ores. In recent years, with the continuous increase in China's copper ore imports, the average import price is declining.
China's copper reserves are relatively scarce, and the domestic resource supply rate is less than 25%. China is the world's largest copper consumption market. Due to the lack of copper resources, most of the copper concentrates depend on import. Our dependence on the international market is serious. The global mining giants are controlling more than 50% of the mine production around the world. Most of the domestic enterprises purchase copper ores through spot contracts. China's import of copper ores is susceptible to fluctuations in international market prices.
Imports back to high growth
Since the begging of this year, China's imports of copper ores have returned to the high growth rate. The average price of import has fallen slightly. The expansion of domestic smelting capacity, the increase of spot processing fees, and the increase of smelting enterprises profits have led to increased domestic demand for copper ores, making imports maintain rapid growth. Affected by the decline in international copper prices, in 2013 China's average import price of copper ores fell from $2215.17/ton in February down to $ 2102.37/ton in April.
In the fourth quarter of 2012, China imported a large number of copper ore. High inventory is one of the factors that lead to the underpowered price rise this year. Copper inventories in both Shanghai Futures Exchange and the London Metal Exchange (LME) remain high, and the prices are obviously suppressed.
The global oversupply of copper is another factor leading to the fall of copper ore prices. According to the data of World Bureau of Metal Statistics, the global copper production in 2012 is higher than consumption, with surplus of 66,000 tons. It is expected that oversupply in the copper market in 2013 will reach 10 million tons, which is expected to be greater in 2014 and 2015. The overseas mines are in the peak period of mining, and copper production is in rapid growth; it is hard for the market demand to increase substantially; therefore, situation copper over-supply will continue.
Due to high inventories and excessive global copper supply, copper prices will remain in downturn for a long time. However, after the beginning of May, the copper market ushered in the hottest season of consumption; copper smelting enterprises started operation significantly; spot consumptions increased; copper prices will have a seasonal rise.
The lack of “pricing power” for copper resources
The characteristics of China's imported copper ore determine the characteristics of the development of the domestic copper smelting industry, whose profit margins continue to be squeezed. Overseas mining giants’ high monopoly on copper resources has deprived Chinese enterprises of the power for pricing copper resources. Although China is the world's largest importer, our imports are controlled by others. With the increasing monopoly of international market supply and the intense competition for resources, China needs to pay special attention to the safety of copper supply.
China's copper mineral resources is characterized by an excessive number of small and medium-sized mine deposits, but a limited number of large and super large deposits, which results in the generally smaller scale of copper mine construction in China. Although the state has made great endeavor to develop the copper mining industry, the effect is not significant. The global copper supply is highly concentrated, the world's nine copper production enterprises control about 50% of the global copper concentrate production. The monopoly on supply has exacerbated the difficulty of China's copper import, resulting in the power of discourse of China's copper enterprises in terms of negotiations about smelting processing fees and about copper ore imports.
In addition, import of copper ore in the spot trading mode has the huge potential risk of dramatic increase or decrease of prices. Chinese enterprises haven’t spent a long time in involving themselves in the international procurement of copper ores and lack experience; neither the international exploration nor mining of the rich mines has the participation of Chinese enterprises. Therefore, Chinese enterprises lack the "pricing power" in the process of negotiation and signing of contracts. Most of them buy copper ores through spot contracts; 80% of copper concentrate imports are spot transactions. They are short of long-term stable supply bases and supply contracts, and have to follow the market prices; therefore, they are more vulnerable to fluctuations in the international market. In the spot trading mode, China's copper prices face the huge risk of dramatic price increase or decrease. The high-proportion spot transactions prevent the domestic smelters from obtaining adequate supply of raw materials, leading to serious constraint on the development of domestic copper smelting enterprises.
The high concentration of global copper supply and monopoly on the supply of copper import have aggregated the difficulty of China's copper products import. As a result, the Chinese smelting enterprises lack the power of discourse in terms of negotiations about smelting processing fees and about copper ore import. At the same time, the demand for copper is closely related to the process of industrialization. The historical experience tells us that in the process of industrialization, developed countries have a huge demand for copper; from a global perspective, the emerging markets represented by the "BRIC countries" will continue to be the driving force of global economic growth. In addition to China, India, a country which is not rich in copper resources and has a large population, has shown a growth rate of 10% in both refined copper consumption and production in recent years. In the future, demand for copper will have a tremendous growth potential. Therefore, China's copper import will face more intense competitions, and the security of resource supply is becoming increasingly prominent.
Based on the natural endowment of domestic copper resources and the pressure of economic development on the consumption demand of copper resources, we should adopt the strategy of "going out" to solve the problem of insufficient supply of copper ore and expansion of the use of foreign copper resources in China. Although some Chinese enterprises have going out to develop foreign copper resources, amount of mineral products acquired in this way is still very limited. The vast majority of copper resources are still obtained through the spot trade.
In this regard, the state needs to continuously guide the enterprise to make timely adjustment of production plans in accordance with market conditions, improve the access threshold of the copper smelting industry, improve industrial concentration, adopt the centralized purchasing model, improve the power of discourse in the procurement of copper ore, while encouraging copper enterprises with the solid strength to stabilize the supply of copper ore resources through investment in overseas copper resources.
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