Copper demand still strong despite trade war: KGHM

Copper demand remains strong despite the US-China trade wars, the chief executive of Polish state-owned copper producer KGHM, Marcin Chludzinski, said at this week's LME Week in London.

"The trade war is troubling for us, it is very difficult to talk about the outlook. We are really hoping for the price to be stable," Chludzinski said. "We will see what will come out of this tariff conflict — there is a lot being said, but not everything said is followed through on."

The US and China have been ratcheting up the rhetoric, with both imposing retaliatory tariffs on imports. The US has imposed three rounds of tariffs on Chinese products valued at $250bn/yr. China has in turn hiked import duties to 25pc on $16bn/yr of US goods.

China raised import duty on US scrap — including aluminum, copper, zinc, lead and nickel — to 25pc in August. The US is one of China's biggest scrap metal suppliers. This tariff, and a tighter impurity threshold for non-ferrous scrap imports, mean that China's copper scrap imports have plunged.

Copper scrap imports in August dropped to 220,000t, down by 30pc on the year. January-August imports fell by 36pc to 1.58mn t, according to Chinese customs data.

Many consumers have switched to using more refined copper to offset lower scrap supply, with refined copper imports rising this year as a result. Total refined and unwrought copper imports in January–August totalled 3.47mn t, an increase of 15pc on the year.

"KGHM mainly sells copper cathodes to China. China Minmetals Corporation is one of our biggest copper buyers, and everything is still going smoothly there," Chludzinski said.

China accounted for 10pc of KGHM's sales revenue in 2017, at 2,159mn zlotys ($579mn) and 582mn zlotys in the first half of 2018. Chludzinski declined to give a volume for sales to China.

KGHM is Europe's second-largest copper producer, with cathode output of 522,000t last year. It operates mines and production facilities in Poland, the US and Chile.

The Sierra Gorda copper and molybdenum mine in the Antofagasta region of northern Chile is the group's biggest foreign investment. The mine is a joint venture between Sumitomo Metal Mining, with 31.5pc, Sumitomo, which has 13.5pc, and KGHM, which owns 55pc. The mine started production in 2014, and is one of the world's biggest molybdenum producers. Molybdenum output is sold under long-term contracts, KGHM said.

About half of KGHM's copper output is consumed by the group's plant in Poland. Europe is the main market for KGHM's copper products, which include wire rod, oxygen-free rod and billets. The volume of cathode sales into Europe varies depending on the group's production and internal consumption.

In the face of price volatility, KGHM is hedging, Chludzinski said.

KGHM has an exchange rate advantage — a "natural hedge" — as its operations are focused in Poland and operational costs are based on the Polish zloty.

As a result, the strengthening US dollar has partially offset the impact of lower KGHM copper sales volumes this year.

Production problems at home and abroad

A maintenance shutdown at Glogow II copper smelter means that this year's output will be down on 2017. But 2019 production will increase as KGHM completes smelter upgrades.

Payable copper production in the second quarter fell by 10pc on the year to 152,000t.

The firm will continue to upgrade its Sierra Gorda processing plant, with debottlenecking due to be completed in 2021 and output expected to reach capacity. The mine's current production capacity is 130,000-140,000 t/yr.

Sierra Gorda has struggled with technical problems since its launch in 2014, which has pushed up costs and dented output. Copper concentrate output totalled 53,400t in 2017, while production in the first half of this year hit 24,500t.

Chile accounts for 20pc of KGHM copper production, while Poland makes up 80pc.

KGHM's main focus remains Poland.

"We still have lots of copper underground, we do not need new assets to improve our production," said Chludzinski.

KHGM has the mining rights for five deposits in Poland until 2063, and is applying for licences to expand its mines.

It also faces deteriorating copper ore grades in Poland, and resulting higher recovery costs. But the company is investing in research and development to increase the recovery rate of lower ore grades and cut production cost.

"It is just how it is in this industry. The grades globally are getting lower and the costs are rising all over the world — it is happening everywhere," said Chludzinski.

Chludzinski declined to reveal the cost floor for KGHM copper production, but said the company is looking to reduce the breakeven level.