Copper producers ask for 1.5 cent/lb rise in 2014 premiums

Wed Nov 13, 2013 1:45pm EST

Related Topics

* Offers made in early negotiations for 2014 contracts

* More metal seen booked on contract next year

* Rise comes even as analysts see surplus next year

By Josephine Mason

MIAMI, Nov 13 (Reuters) - Some copper producers have asked U.S. customers to accept a 75 percent increase in premiums for 2014 contracts as strong demand from China, the world's No. 1 consumer, has boosted prices there and tightened domestic supplies, market sources said.

During initial talks at the American Copper Council meeting this week, suppliers tabled an increase of 1.5 cents per lb for premiums on a delivered basis to consumers in the southern United States, traders, producers and consumers said.

That is the biggest rise in several years and would take next year's premium to 3.5 cents per lb, compared with 2 cents this year. Premiums are paid on top of the London Metal Exchange benchmark for physical delivery of metal.

While the percentage rise is significant, the 1.5 cent increase measured in dollars per tonne is about $30, which is in line with the rise in premiums in China and Europe, sources said.

The contract premium is also still much lower than the spot market, which is around 5 cents to 7 cents per lb.

Even so, such a big increase will be tough to stomach for copper fabricators, which make electrical wire and plumbing equipment, with some analysts forecasting the global 20-million-tonne market will be in surplus next year.

There are few signs of a significant improvement in underlying real consumption either. The U.S. construction market has shown tentative signs of growth, but many are worried about a potential slowdown in demand from China.

Nicholas Snowdon, a base metals analyst at Barclays Capital, expects term contracts to rise by 30 percent in 2014, even though the market will swing into a surplus of about 200,000 tonnes from a deficit this year.

The main driver behind the U.S. increase, the biggest in many years, is Chinese demand, which has tightened domestic supply, market participants said.

"The upside surprise (this year) has been how strong Chinese demand has been," he said.

He has adjusted higher his forecast for refined copper demand growth this year to 10 percent from 6 at the start of the year.

CHINA WORRIES

Talks are likely to be complicated further by worries that China's voracious appetite for imports does not reflect underlying consumption.

While the world's second-largest economy continues to buy copper to build its rapidly expanding infrastructure and housing market, a big portion of the rising imports in recent months has been used as collateral for short-term loans, according to the traders.

That has bolstered spot premiums in Shanghai to around $190 to $200 per tonne from $175 to $200 in September.

These are early offers to kick off annual negotiations and the final terms are likely to change.

End users are likely to push for a more moderate 1 cent increase.

"The gap between what the consumers want and what they'll get is still very wide," said a source at a big U.S. consumer.

IN A BIND

Consumers are in a bind though. With the spot market between 5 cents and 7 cents per lb, it might be better to secure material and swallow the increase in annual terms than leave themselves exposed to the spot market.

Spot premiums in the United States have surged almost 40 percent since November last year, largely because of tighter supplies as more metal is shipped to China, where premiums are higher.

More metal is also stored in warehouses outside of the LME-registered network that charge less rent, creating the perception of falling availability.

Copper stocks in CME Group Inc COMEX warehouses have fallen 73 percent since May to just under 24,000 short tons, their lowest since 2008.

Global LME stocks have fallen 30 percent to around 460,000 tonnes.

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