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Sources say a recession is likely in Europe, citing inflation, energy prices and a host of other issues that could weaken the region’s economy. So while copper is seen as a sign of economic strength, concerns about falling consumer demand and a looming recession mean European copper premiums are likely to be affected.

The European copper market is also currently relatively tight as Russian copper imports into the region decline, according to multiple trade sources. They said this was exacerbated by the large volume of Russian copper already held in European warehouses, limiting available space.

Annual contracts are set at a record high, up 85% from last year, but with no clarity on demand in 2023, the question market participants are asking is:

Lack of clarity on the 2023 requirement

In all base metal markets, there is no certainty about the likely consumption in the coming year. It is difficult to clearly imagine how consumption will develop in 2023. Duncan Hobbs, head of research at British commodities trader Concord Resources, predicted two possible scenarios.

First, the European economy may flag and there will be a reduction in copper requirements. “A weakening economy is reducing consumer spending,” Hobbs said. “Europe, and Germany in particular, are major exporters, so global economic setbacks could affect copper needs… [prices for copper] may fall into this scenario.”

The second scenario describes a smaller decline, indicating that copper demand is higher than expected. “If, however, the decline is not very great,” said Hobbs, “consumers may be limited; [on supplies] and should from more sources [the spot market] later in the year, thus driving up premiums.”

Most market sources believe there are likely to be issues affecting demand. One analyst said demand is likely to be slightly lower in 2023, and while the power sector and parts of the industrial sector will be less hit, consumption in end-users and construction is likely to be poor.

Traders told Fastmarkets in December 2022 that the difficult economic situation will have some impact on the European copper market in 2023. Although the automotive sector is doing well, one trader added that “every other sector is already weakening” and that the market may not be “good” as things stand.

A second trader provided a slightly more upbeat outlook, agreeing that auto demand is returning, but adding that electronics is also “booming,” although he acknowledged that construction is a “disaster.”

The same trader also said that “barring any new drama, everything should be fine,” adding that he was “relatively optimistic” about 2023.

Apart from construction, the same source believes that demand will return to pre-Covid levels, concluding that in 2023 “volumes will not be weaker” than in 2022.

Supply concerns are expected for the coming year

A number of sources also expressed concerns about supply. Hobbs said the market is “pretty tight” right now.

The first trader said the drop in Russian copper imports to Europe was “more than offset by lost demand”. He noted that Europe would lose huge volumes from its traditional sources of supply due to reduced demand for Russian materials in light of trade sanctions against the country following the invasion of Ukraine.

A second trader source agreed, saying that in 2023, much less Russian copper will enter the European market than in previous years. A third trade added that Russian materials are already less likely to be accepted by the end of 2022.

Another factor limiting supply is that London Metal Exchange inventories entered 2023 with the lowest annual opening inventories since 1997. they were in need, but this year will be more difficult.

The stockpiles issue is made more volatile by the fact that much of the copper in European stockpiles is of Russian origin, according to multiple copper and trade sources. According to the latest LME data, copper stocks are down 36% year-on-year.

Supply concerns, along with a number of other factors such as increased freight and production costs, have sharply increased the level of the annual copper premium, which Fastmarkets understands is being negotiated to $230 a tonne.

Aurubis and Codelco’s benchmark annual figures for 2023 were both more than 80% higher than last year. Fastmarkets was also told that annual trader figures were agreed close to those figures.

“Good demand for refined copper is expected to continue in 2023, and combined with the very low inventory situation in all three exchanges, this points to a continued tight market for 2023,” said Michael Helleman Sorensen, senior vice president, commercial. Aurubis said on October 13 when discussing the increased premium.

Soerensen added that the increase is due to “dramatic increases in production costs and very high freight rates, combined with good demand for refined copper expected in 2023 and a tight market.”

Spot supply will affect the spot market

The effects of a tight supply situation in Europe, a lack of clarity on demand and record high annual contract prices are likely to have implications for the spot market.

Initially, when the Aurubis and Codelco numbers first sounded in the market, participants said some may be willing to leave more of their supply needs in the spot market. With high annual prices and a potential downturn on the horizon, many market participants told Fastmarkets that some who normally rely on annual deals are leaving more material in the spot market.

The argument was that if demand fell as much as some thought it might, spot prices could fall well below the annual contract level. In this situation, consumers will not be able to recoup the premiums if they need to sell the unused material.

Beyond this, in theory, if spot levels fall, consumers could save money in 2023 by buying a higher-than-usual percentage of their material on spot terms.

Ultimately, however, consumers seem to have widely accepted annual pricing. “No one wants to be short,” said the second trader. “Customers don’t really think locally [as a replacement to annual deals]”, he continued, adding that despite discussions about an increased focus on spot trade, these discussions had subsided by the end of the year.

It’s not worth the risk to save “a few bucks,” added the second. The first trader source said the reliance on spot deals led to more time constraints and less consistency than annual deals, meaning fears of increased reliance on spot trading are unlikely to materialize.

Sources said, however, that the balance of annual contracts is likely to shift slightly to spot compared to spot trading, if only because consumers are ordering reduced volumes due to demand concerns.

In the first pricing session of 2023, on January 10, Fastmarkets estimated a premium for A grade copper cathode supplied by Germany at $160-$190 per tonne, compared to $140-$160 per tonne in the previous pricing session. The upward move was driven by market participants already commenting on the impact of new annual deals.

Fastmarkets on the same day estimated the premium for copper grade A cathode, cif Leghorn, at $150-$170 per tonne. But the premium could reach up to $200 per ton because “there is a lot of confusion in the market right now.”

And Fastmarkets on January 10 estimated the premium for copper grade A cathode, cif Rotterdam, at $50-$100 per tonne, unchanged from September 6.

A trader’s source said that because annual deals were so large until 2023, many market participants were confident they were well supplied for the first quarter, hoping there would be no need to resort to the spot market.

Stay up to date with copper market developments on our dedicated copper market page.


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