Following Pan Pacific Copper's decision to reduce its 2016 contractual premium to $105 per tonne, a $10 drop, many market participants expected Codelco would establish its benchmark at about the same level.
However, on Monday the Chilean state-owned producer announced a 26.3% drop in its 2016 premium, in what market participants believe is a response to a reduction in contractual orders in 2015 and rising competition for business in the Chinese market.
Poor copper premiums this year caused losses for traders who signed long-term deals at either $133 per tonne offered by Codelco or at about the $120 per tonne level from other suppliers, only to find the spot market trading below those levels.
The monthly average of the premiums for copper in-warehouse Shanghai assessed by Metal Bulletin have not been above $120 per tonne throughout this year.
With supply set to increase further against the backdrop of slower demand growth in 2016, many traders and copper users in China were considering running a larger exposure to the spot market next year to avoid losses on contractual premiums, market sources said.
Ahead of the Codelco offer on Monday, some traders were offering Chinese customers annual premiums of $90-95 per tonne
in a bid to win business, while some rival producers have also become more open to offering monthly floating spot premiums in supply contracts.
Facing such competition, Codelco may have felt it was necessary to reduce its own benchmark premium aggressively to avoid a sharp drop in contractual orders, market sources said.
Chinese buyers reduced their long-term bookings during mating season last year due to the tight credit lines and a slowing domestic economy, leaving the Chilean producer with larger tonnages to sell in the spot market, according to trade sources.
"We got call from Codelco a few months ago asking if we are interested to buy some cathode; it has never happened before that Codelco has actively contacted us,” a Chinese buyer said.
A source at a major Chinese copper trading house told Metal Bulletin that his company had received the $98-per-tonne offer, but added that it may seek a discount on the benchmark. The premium was confirmed by three other buyers who had also received the same offer.
Codelco declined to comment.