China's Jinchuan May Halve Its Copper Supply

CHINA NEWS
June 6, 2013, 5:30 a.m. ET
China's Jinchuan May Halve Its Copper Supply
The Company's Force Majeure Will Likely Push Copper Prices, Premiums Higher

By CLEMENTINE WALLOP And YUE LI

A major Chinese copper producer has declared force majeure at one of its smelters, in a move that is likely to halve the amount of metal it supplies to customers for the next few months.

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Combined with outages at two large copper mines in the U.S. and Indonesia, lower output from Jinchuan Group's Gansu province plant could result in higher copper imports by China. It may also shore up international copper prices on the London Metal Exchange and push up physical premiums, the charges that buyers pay suppliers to secure the metal.

The force majeure could pare a hefty global copper surplus that many analysts had been expecting in 2013 because of new mine supply and softening demand in some regions. The declaration comes during China's peak copper-demand season. China is the world's biggest copper consumer, using some 40% of global output annually.

Jinchuan, China's third-largest copper producer by output, has sent out a notice to its buyers notifying them of the possible supply disruption, a company official told The Wall Street Journal. The force majeure was declared due to equipment failure at a copper smelter in Gansu, the official said. He didn't elaborate.

"We received a fax from Jinchuan yesterday, and it says they're going to cut the supply [to customers] by half in the coming months," said a purchasing manager at a copper cable maker on Thursday. He said his company has a term contract of about 50,000 metric tons a year with Jinchuan.

The force majeure would translate into a short-term supply disruption of at least 20,000 tons a month in the domestic market, given that Jinchuan typically contributes 40,000 to 50,000 tons of refined copper a month, industry participants said.

To meet their needs over the next few months, Jinchuan's customers may turn to China's bonded warehouses for copper, or they could take metal from London Metal Exchange sheds, which should drive China's copper imports higher, some metal traders and analysts said.

"Chinese imports are likely to increase, particularly so because copper prices in China are high and the supply disruption can only push prices even higher. We may see more Chinese buyers taking delivery of London copper," said Joyce Liu, an investment analyst at Phillip Futures in Singapore.

China's April imports fell 21% from a year earlier and were down 7.4% from March, at 295,799 metric tons, the lowest level since June 2011, according to customs data released in May.

An increase in Chinese imports would follow several months of muted demand for the metal, which is widely used in sectors as diverse as the automotive, construction and appliance industries.

"This [will] further reduce the refined copper surplus for the year and keep onshore physical premiums [in China] elevated," said Sijin Cheng, commodities analyst at Barclays in Singapore.

Traders in Singapore and Shanghai estimate that physical premiums may rise later this month as a result of lower output by Jinchuan.

"We have been saying that the refined market has been tightened by a scrap shortage in China and disruptions in several other markets," Ms. Cheng said, referring partly to supply problems at two of the world's largest copper mines: Freeport-McMoRan Copper & Gold Inc.'s Grasberg operation in Indonesia and Rio Tinto PLC's Bingham Canyon mine in the U.S.

Jinchuan is likely to miss its output target of 600,000 tons of refined copper by the end of this year, mainly due to a shortage of scrap copper and the unexpected force majeure, the company official said. He forecast Jinchuan's copper output will total around 250,000 tons this year.

Copper prices briefly rose from the day's lows after the force-majeure news, but remained firmly in negative territory on the LME Thursday, as some investors cut their exposure to risky assets ahead of Friday's U.S. jobs report.

Three-month copper futures were trading at $7,367.50 a metric ton, down 1% from Wednesday's settlement.

Write to Clementine Wallop at clementine.wallop@dowjones.com

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