Market environment and trends

Active participants in the business ecosystem will remember January 2020 mainly because of the “ceasefire” in the trade war between Washington and Beijing. After months of friction on the top levels, both countries decided, after many rounds of negotiations, to sign publicly the first phase of the agreement, easing the conflict that has become the main theme of the Trump – Xi Jinping relationship.

The euphoria caused by the ambitious goals of the trade agreement was however quickly marginalised by another event, which will make its mark on the history of the 21st century. In 2020, the world faced the most serious pandemic for over century and its impact will be felt for a long time, not only economically but also in terms of social contact. At the threshold of December 2019 and January 2020 a wave of pneumonia was reported in China, while on 11 and 12 January 2020, the Chinese authorities provided to WHO the genetic sequence of the SARS-CoV-2 virus. The Chinese authorities decided to react very strongly, by locking its economy down for dozens of weeks. For commodity markets and commodity consumption dynamics, the Chinese lockdown resulted in a massive oversupply in virtually every market. As further restrictions were announced in other regions of the world, the prices of assets on financial market started to decline, irrespective of their role in the global economy and the strength of their foundations. The coronavirus pandemic accelerated the decline in copper prices, which were declining steadily in consecutive quarters after reaching a local peak in 2018. Stock markets, currencies of emerging markets and assets with increased investment risk reacted in the same way. Credit spreads increased as well as the VIX volatility index, which is often referred to as the fear index (the latter rose to record high levels). Liquidity started to decline on the market, which clearly pointed to a huge increase in risk aversion and a wave of impending crisis.

According to the most recent estimations of the International Monetary Fund (IMF), the global GDP growth rate in the crisis 2020 fell by 3.5%, compared to 2.8% growth in 2019. The projected growth rate slowed down in both developed economies (-4.9% in 2020 from 1.6% in 2019) as well as in emerging economies (-2.4% in 2020 from 3.6% in 2019). The result of the US economy in 2020 is estimated at -3.4% (2.2% in 2019), while the slow-down in the Euro zone should reach 7.2% annually. The only country, whose economy posted positive economic results was the People’s Republic of China. In 2020, the growth rate of the Chinese economy was 2.3%, declining from 6% in 2019. At present, the IMF economists envisage that the global economy will return to a growth path in the coming years, however the institution has been changing its forecasts considerably over recent months.

IMF’s real GDP growth forecasts in January 2021 vs. previous forecasts.

The most recent update in forecasts for Poland and Chile was made in October 2020; Source: International Monetary Fund, KGHM Polska Miedź S.A.

The year 2020 was very volatile for the copper market. It is a rare occurrence for the price of copper to record both a local minimum and a local maximum within a single year.

The price of 3-month copper noted its lowest level during the year (4,371 USD/t) on March 19th. After a few days, the value of the red metal started to climb steadily. The investors saw the highest price on December 18th when it momentarily broke through the 8,000 USD/t level reaching 8,028 USD/t. The year 2020 closed with copper prices at the London Metal Exchange (LME) at 7,766 USD/t. Taking cash settlement prices into account, copper rose by 26% last year (closing of the first day vs. last day of the year), achieving in the period both the lowest price since 2016 as well as the highest level since 2013.

The decisive measures taken by most governments of developed countries in order to slow down the spread of the pandemic were the direct cause of the global economy collapse in the 2nd quarter of 2020. The macroeconomic data from that period were compared to the largest economic crises in the history of several last centuries. The assessments issued by the most reputable international financial institutions, including the International Monetary Fund (IMF), OECD or the European Central Bank mentioned an immense shock for the global economy, which will be felt for many years. Price forecasts for many assets for the next years were revised downwards several times. For a longer period, there was no consensus as to how and how fast the global economy will get out of the crisis; some market players expected a long period of recession. Taking into account the scale of the pandemic observed in many regions of the world, information on the successful containment of the virus in China was often questioned.

The rallying prices of the red metal starting in April resulted mainly from the stimulus packages introduced by China. This happened at a time when the rest of the world was introducing a lockdown. The increase in goods purchased by China was assessed as an opportunity to use the market opportunity to purchase at lower prices, rather than a permanent trend of increased demand. Chinese buyers, who were afraid of disruptions in the production of copper, mainly in Peruvian and to a lesser extent Chilean mines, began to purchase global surpluses of copper cathodes from the market. This nearly doubled imports of refined copper products in the individual months of Q2 and Q3 2020, which, when added to COVID-19-related disruptions in production, resulted in continuing increases in prices. The efforts of the world’s scientists focused on vaccine research, but forecasts at the time indicated that the pandemic recovery period would take a few or even more than ten quarters, which also translated into expectations about future prices.

It is estimated that “apparent demand” in China, which is demand calculated on the basis of production, trade and warehousing data, increased in 2020 by double digits, while the purchases made by China’s SRB, as estimated by market players, amounted to 0.5 to 1 million tons. When analysing demand for refined copper, these purchases (when we average the estimated purchases at 0.75 million tons) is about 3% of annual demand. ICSG estimates that global mining production fell by 1.5% to 20.45 million tons, refined copper production went up by 1.6% (24.52 million tons), while apparent demand for copper was maintained at the 2019 level (24.49 million tons). This forecast implies a marginal deficit on the market at 50 thousand tons last year.It should be noted that the increases in copper prices in the second half of 2020 did not result only from the play of physical supply and demand, but also from the considerable interest of speculative capital. As a result, in December copper prices were nearing long-term peaks.

Cheap money came mainly from central banks, which, after the pandemic shock, decided to cut interest rates and resume their quantitative easing programs with a much greater force. With the almost free and continuously depreciating U.S. dollar, news of imminent vaccine production in late November further supported the direction of copper price movement and increased risk appetite even further. For raw materials associated with the “green revolution”, Joe Biden’s victory in the presidential race in the United States was an important event. Donald Trump’s defeat ignited investor hopes for another round of fiscal easing and a chance of fulfilment of Trump’s promise from the past to carry out a program of infrastructure investments, which would entail high consumption of raw materials.

The first weeks of 2021 were rich in events of significance for the financial markets. Individual countries have already started their struggle with the second or even third wave of coronavirus infections. New cases also appeared in China, which caused a lockdown of the entire 11-million city in the Hebei province and consequently temporary concerns about the continuation of the global economic recovery.

The temporary increase in uncertainty halted the appreciation of copper prices in January. In subsequent weeks, an increasing number of financial institutions started to notice the potential problem with the market availability of the raw material in 2021 due to the increased physical demand, threats to supply and the low level of official exchange inventories. Such rhetoric, combined with a growing belief in the positive impact of the more intensive decarbonisation policy on the long-term prospects of the copper market, resulted in increased interest of investors in the copper market. One of the leading investment banks was already publishing its optimistic expectations for a new super-cycle in the commodities market starting at the end of November 2020 and in the following weeks it continued to raise its price forecasts to stay ahead of the high market dynamics at the time. The rise would not have been possible at this scale had it not been for the steadily added speculative long positions on LME, COMEX and SHFE. The interest of financial investors contributes to higher levels of market changes, both upward and downward. The current market forecasts are very diverse and point to a very broad range of price expectations for the coming periods – from ones anticipating an attack on the historical price peak, to more balanced ones envisaging a stabilisation at much lower levels that have been observed since the beginning of the year. The increased activity of investors on the Shanghai exchange (SHFE) could have been caused by the shortening and, in some cases, absence of production shutdowns during the 7-day celebration of the Chinese New Year. The manufacturers supplying the air conditioning industry increased purchases of copper cathodes by 20% versus the same period in previous years, while Chinese plants processing semi-finished copper increased their raw material inventories before holidays to nearly twice the average historical levels.

Financial markets also experienced a rare event, which was the activity of the community of individual investors from an online forum Reddit. The coordinated actions of this community led to a so-called short squeeze on the stock of GameStop, causing multi-billion-dollar losses for mutual funds that had an immense short position in the company’s stock. After the successful rally, there were rumours of another operation, this time targeting the silver market, which caused a noticeable rise in volatility and metal prices in early February 2021. Large amounts of cash flowed into ETFs, while many silver coin traders experienced significant delays in fulfilment of their orders. In the days that follow, the situation stabilised and the price of silver returned to the upper regions of the range, in which it moved since August 2020.

The primary products of the Group, i.e. copper concentrates, cathodes, copper wire rod and silver in the form of bars and grains, are traded on the highly-competitive global market as well as in reference to the commodity markets. Individual markets for the products offered by the Group have varied rules and customs concerning trading and pricing standards. Their incomparability is also due to the characteristics of individual products, which impacts their usage and the diversification of market participants.

The primary products offered by Group companies are: copper concentrates, cathodes and copper wire rod. They are products of individual stages of copper ore processing and recycling of copper scrap. For all of these products, the price benchmark (i.e. the global benchmark of copper prices for physical sales contracts of copper-bearing materials and products) is stock market quotations, with the cash settlement of the London Metal Exchange (LME) being most commonly used. Less commonly used are alternative quotations of copper on stock exchanges in New York (COMEX) and Shanghai (Shanghai Futures Exchange – SHFE). Grade “A” type, with a copper content of at least 99.99% (standard BS:EN 1978:1998 – Cu-CATH-1) is quoted on the LME. In order to be able to apply stock exchange prices to purchase/sale transactions of the products to which this quality standard is not applicable (i.e. all types of copper-bearing materials like copper concentrates, copper scrap or more processed products like copper wire rod), market participants have developed a premium and discount system, which adjusts stock quotations. It allows setting of a market price for a product which takes into account its processing stage, its physical state and chemical make-up, as well as costs of transport and insurance to an agreed delivery destination and the current availability of the metal in a given location.

Approx. 71% of global metallic silver production is a by-product of mining ores of other metals. Silver, due to its unique physical characteristics, is used in the jewellery, electronics and electrical industries, as well as in medicine, optics, the energy industry and many others. It is also applied in newest technological solutions, among others in infrastructure, automotive industry and photovoltaics. In total, industry utilises approx. 50% of global silver production. It is also a valued investment metal. According to preliminary estimates of Metals Focus, in 2020 global production of mined silver amounted to 24.4 thousand tonnes.

Source: Metal Focus – preliminary data, KGHM Polska Miedź S.A.

Usually, participants in the silver market make use of London Bullion Market Association quotations when setting the price for silver in physical transactions, after adjusting for current market conditions.

KGHM Polska Miedź S.A. produces silver in the form of bars and grains (produced at the Głogów Copper Smelter and Refinery) and is one of the largest producers of metallic silver. In 2020, KGHM produced approx. 1,200 tonnes of silver, making the Company one of the world’s leading producers of silver. Silver in the form of bars is registered under the KGHM HG brand and has a registered certificate on the New York Mercantile Exchange (NYMEX) as well as Good Delivery certificates issued by the London Bullion Market Association. Silver is supplied in the form of grains to the jewellery shops and metals industries producing alloys containing silver. Silver in the form of bars (ingots) is purchased in large part by financial institutions.