African copper backlog disrupts spot trade, complicates annual talks

A massive backlog of copper cargoes across Africa - ranging from concentrates and intermediates to refined copper - is putting a massive strain on the spot market supply chain and its impact is spilling over into contractual talks for 2022.

“My blister copper cargo from Africa should have departed in late July. I kept refreshing the schedule status, but there is nothing new. Our Chinese client is very annoyed, but what can we do except saying 'sorry' ?” a source at a major trading house told Fastmarkets this week.
Last year, an average of 115,000 tonnes of copper concentrates and 60,300 tonnes of blister copper and anodes were shipped from the world's second-largest continent every month, according to the International Copper Study Group (ICSG).
Most of this copper find its way to Asia and Europe via ports in South Africa (Durban), Namibia (Walvis Bay) and Tanzania (Dar Es Salaam), which have been operating at lower rates due to the container shortage that has been in play since this summer. Major copper producers had to roll over the third-quarter shipments as a result.
Although shipment delays are becoming a global phenomenon, the African copper backlog - which is still growing - was described as “highly unusual” by Duncan Hobbs, research director at trading house Concord Resources, because of its sheer scale and duration, as well as its potential impact on both spot and long-term trade flows.
“The ongoing African logistics delay happened for various reasons, [including] lower port productivity due to the pandemic and a [reduction in the number of] ships returning to the continent,” Hobbs told Fastmarkets on Tuesday November 9.
Although the multi-month delays from Africa should not cause a genuine change in the demand-supply balance in the copper market, it does mean that back-up stocks are being consumed and has caused a surge in spot buying appetites for buffer stocks to cover for delays causing an increase in working inventories along the supply chain, he added.
'No-show' copper intermediates
“I will say no to any African spot copper offer from now on,” a procurement manager with China's top copper smelter said. “My copper shipments from Zambia and the Democratic Republic of the Congo (DRC) have never arrived. What is the point of me booking anything new?”
Home to First Quantum's Kansanshi mine, CNMC's Chambishi mine and the disputed Konkola Copper Mines (KCM), Zambia produced 750,600 tonnes of blister copper and anodes in 2020.
Zambia usually provides 40% of China's supplies of blister copper - an intermediate product typically of 97-99% copper content and a major raw material for Chinese copper smelters and fabricators to produce cathodes and finished products.
Delayed blister copper shipments could mean a lack of feed for China's copper furnaces, which alone produce 40% of the world's refined copper output.
“Our furnaces can't wait - although the power cuts have helped us a bit. We will still end up paying more to buy domestic blister [copper or] scrap on the spot market to make up for the ‘no-show’ cargoes,” the procurement manager said.
With minimal activity in the spot market, Fastmarkets' price assessment for copper blister 98-99% RC spot, cif China was $150-170 per tonne for October, unchanged from the previous month.
“We can't always be waiting. We may cut the African contractual volumes for next year. God knows when this will end,” the procurement manager added.
Before it becomes clear whether the African cargo delays will extend into next year, copper miners, traders and smelters are already playing dodgeball to avoid being hit by burgeoning logistics costs for next year's contracts. 
Why the African cargo backlog could linger
Shipping lines make decisions based mainly on their relationship with clients, the frequency and consistency of shipments and the likelihood of arranging return cargoes for specific routes, as well as the types of goods being carried.
“It comes down to shipping line priorities,” a DRC mining company source told Fastmarkets. “Most exports out of Africa are raw materials. Would you rather ship iPhones from China to the United States, when shipping cost takes a very small percentage of the total value, or would you rather ship copper concentrates from Africa to China, when you have to pay to clean the vessel afterwards?” 
“We do not see it as a short-term problem with all the ports jammed up. It may well continue for another year,” he added.
The competition for vessel space in Africa has intensified after DRC's mega copper mine Kamoa Kakula debuted in May, with a quicker-than-expected ramp-up since then.
The biggest greenfield copper project of the past decade, which is run by Ivanhoe Mines, it is now facing a tough time marketing its ultra-high grade 50% copper concentrate with relatively low sulfur content, multiple African market participants said.
“With copper prices so high now and the backwardation structure in place, it is very expensive to finance Kamoa Kakula cargoes. We have seen a fair amount of them on offer, but who could afford it? It only makes sense if we can process it in Zambia, but we don't want to.” a second trader source said.
“The combination of high costs taking up credit lines and the lack of sulfur, coupled with surging acid prices, means that people are just not really interested in it,” a second producer source said.
Currently, around 40% of the phase-one Kamoa Kakula output is going to CNMC's Lualaba copper smelter for blister production.
With the mine's phase-two expansion coming up in 2022, Kamoa Kakula's output will double to 400,000 tonnes of copper per year - equivalent to roughly 800,000 tonnes of concentrates.
A lot of crying
On top of rising logistics and backwardation costs, along with copper price volatility, the African copper backlog caught many by surprise this year, prompting market participants to actively explore options on passing on the risks in 2022 contracts.
“Imagine you are a trader signing a 2021 supply with a $6,000 per tonne copper price budget, expecting a contango, [on an] fca mine basis, with a 60-day transit and $6-per-tonne shipping costs - which has increased more than 10 times this year. There have been a lot of crying traders this year [and] they won't make the same mistake again,” the DRC-based miner source said.
Some African copper miners have already been looking to change the incoterms from cif Asia to “pick-up-at-mine-gate” (exw) for next year's sales, the source said.
“Some traders and smelters are looking to set up cost-sharing mechanisms. Some just add a clause saying ‘we reserve the right to send you an extra invoice on finding vessel space’,” the source added.
With limited availability of containers, both spot and contractual rates are expected to remain high into next year - even if the peak has passed, Hobbs said.
“More negotiation tension will be seen in contract talks,” he said. “For instance, who will bear the costs of demurrage, or the other consequences of delays?”
Benchmark negotiations on processing charges for blister copper and copper concentrates recently started. Last year they were settled at $145 per tonne and $59.5 per tonne/5.95 cents per lb, respectively.

Julian Luk

julian.luk@fastmarkets.com

Published

Julian Luk

November 11, 2021

10:50 GMT