Integrated Report of KGHM Polska Miedź S.A.
and the KGHM Polska Miedź S.A. Group
for 2020

Market environment and trends

GRI[ ]

We are aware that sustainable development of the mineral resource industry has become a global challenge for the modern world. In 2020, KGHM Polska Miedź S.A. was actively involved in broad consultations accompanying the process of developing the Copper Mark standard, which is a response of the copper industry to the expectations and requirements of the broad group of stakeholders, including commodity exchanges, investors, financial institutions and non-government organisations, regarding the compliance of registered copper producers with the principles of socially responsible business as well as with ethical, environmental and organisational standards.

Paweł Gruza
Vice President of the Management Board (International Assets)

Macroeconomic conditions

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.

kghm_10 kghm_10

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 pandemic caused a shock on the financial market. It led to disruption in the operation of the market and even caused a short, unprecedented inability to conclude financial transactions. In the second half of April 2020, the situation reached a point, in which the oil price on one of the contracts fell below zero, raising questions about the stability of the commodity valuation system. On the copper market, the cargo logistics area was affected considerably, which resulted from restrictions in travel and transport with an unpredictable duration. The lockdowns introduced by individual countries caused significant interruptions to production processes in many sectors. In addition to the restrictions causing immense losses for many companies, the considerable uncertainty as to the course and depth of the crisis was an additional factor affecting the decision-making process in the period. The common view was that the crisis was completely different from the ones experienced in the past. It was not caused by disruption in the operation of the financial system or a speculative bubble, but rather by a sudden decline in economic activity of businesses and households as well restrictions in respect to physical mobility, which could ultimately lead to a wave of bankruptcies. All attempts to predict the manner of recovery from the financial crisis were limited to the predictions of the pace and successive waves of the pandemic in subsequent quarters and years and were based on few available historical analyses and scientific studies.

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.

Source: Refinitiv, KGHM Polska Miedź S.A.

Macroeconomic factors significant for the operations of the KGHM Polska Miedź S.A. Group – average prices 1)

Unit 2020 2019 Change
IVQ’20 IIIQ’20 IIQ’20 IQ’20
Copper price on the LME USD/t 6,181 6,000 +3.0 7,166 6,519 5,356 5,637
Copper price on the LME PLN/t 23,975 23,029 +4.1 27,073 24,789 21,871 22,056
Silver price at the LBMA USD/oz t 20.54 16.21 +26.7 24.39 24.26 16.38 16.90
Molybdenum prices at CRU USD/lb 8.9 11.85 (24.9) 8.84 7.98 8.94 9.86
USD/PLN exchange rate according to the NBP 3.8978 3.8399 +1.5 3.7804 3.8022 4.0946 3.9237
USD/CAD exchange rate according to the Bank of Canada 1.3415 1.3269 +1.1 1.303 1.3321 1.3853 1.3449
USD/CLP exchange rate according to the Bank of Chile 792 703 +12.7 762 781 823 803
1) arithmetic average of daily quotations

The average annual price of copper on the London Metal Exchange (LME) in 2020 was 6,181 USD/t, 3% above the average 2019 price (6,000 USD/t).

The beginning of 2020 on the precious metals market was characterised by a low volatility and low interest from investors. The outbreak of the SARS-CoV-2 pandemic led to a collapse of industrial activity, which resulted in a decline in silver prices on the market below 12 USD/oz t. The decline in interest rates and expansion of central banks’ balance sheets drove investment demand, which steadily pushed up the value of silver until August 2020, when the metal reached the maximum price of nearly 30 USD/oz t. The upward drive slowed down, consolidating the price of silver at 23-25 USD/oz t, with slight fluctuations from this range. The increases in gold and silver prices were accompanied by a rapid inflow of investments to ETFs and a strong physical demand for coins and ingots. At the end of 2020 the price of silver reached about 26.50 USD/oz t. The average price of silver according to the London Bullion Market Association (LBMA) rose in 2020 by about 26.7%, reaching 20.54 USD/oz t, compared to 16.21 USD/oz t in 2019.

The main factor affecting the price of molybdenum in 2020 was high volatility of the demand side. For a long time, the price of the metal remained within the range of 8-10 USD/lb, but low oil prices causing profitability issues in the oil industry and limited activity on the steel market (outside China) shook up the demand side for molybdenum. Consequently, the average price of the metal in 2020 was 8.90 USD/lb and was 24.9% lower than the 2019 average (11.85 USD/lb).

2019 was relatively peaceful in terms of volatility of PLN exchange rates, but 2020 witnessed significant fluctuations in the PLN exchange rate to the Euro and the US dollar. The main players on exchange markets were central banks, including the NBP, which reduced interest rates to the vicinity of zero for the first time in history and launched a quantitative easing program. The extent of the Polish quantitative easing was however relatively small as compared to what other central banks did across the world. The USD/PLN rate reached the highest level in March 2020. At that time it was about 4.26, after which PLN started to appreciate again. The PLN closed the year 2020 at 3.7584 PLN per US dollar (NBP fixing of 31 December 2020). The average USD/PLN exchange rate (according to the NBP) in 2020 was 3.8978 and was 1.5% higher than the 2019 average exchange rate (3.8399 USD/PLN).

In 2020 the Canadian dollar appreciated slightly against the US dollar, when comparing the exchange rates in this currency pair on the first and the last days of the year. The average USD/CAD exchange rate (according to the Bank of Canada) in 2020 was 1.3415, which was slightly higher (by 1.1%) than the 2019 average exchange rate (1.3269).

In the case of the USD/CLP rate, it is worth noting that the Chilean currency depreciated in the first half of 2020 as compared to previous years. The weakening of CLP was caused mainly by a decline in prices on the raw materials market and the limited functioning of the economy, including the mining industry, which is a very profitable branch of the Chilean economy, as a result of the COVID-19 pandemic. This effect was augmented even further by the numerous social protests in the first half of the year, which adversely affected local economic growth. In the second half of the year, the steady increase in prices of commodities strategic for the Chilean economy slowed down the depreciation of the peso. The average annual USD/CLP exchange rate (according to the Bank of Chile) in 2020 amounted to 792, which meant a weakening of the local currency vs. the USD by 12.7% (703 in 2019).

Macroeconomic conditions at the start of 2021

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.

Analysis of the global market for the Group’s basic products

  • 102-2

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.

Copper concentrate is a product made by processing/enriching copper ore, which usually has a relatively low metal content and is not suitable for direct metallurgical processing. Copper content in concentrate varies within the range of about 20 to 40 percent, which enables further processing in copper smelters and refineries. The cost of transporting products with a lower copper content (for example copper ore) basically eliminates them from trade in the global market (with certain exceptions), therefore it may be assumed that copper concentrate is the first product of processing copper ore that may be generally traded. As a result of metallurgical processes copper is produced along with various by-products (mainly precious metals, sulphuric acid, lead, etc.). The main participants of the concentrate markets are mines supplying the product to the market and smelters and refineries, for which the concentrates are materials for production. Trading companies also play a role on this international market, intermediating in the purchase/sale transactions and offering additional services expected by the parties. The total global copper production in Cu concentrates in 2020 is estimated (according to CRU) at 16.8 million tons.

Source: CRU, KGHM Polska Miedź S.A.

Copper concentrates require processing into refined copper, which leads to incurring processing costs and the incomplete recovery of metals in individual production stages. Therefore, the transaction price should have a set of discounts as compared to quoted prices for refined copper. The benchmark of these discounts (for TC/RC) is determined during negotiations with the main producers of concentrates (Freeport McMoRan, Antofagasta) and their customers (mainly Chinese and Japanese smelters and refineries).

Group companies participate in the copper concentrate market mainly by selling the concentrate from Sierra Gorda in Chile and from Robinson in the USA. Occasionally, KGHM Polska Miedź S.A. also sells copper concentrate produced by the Lubin, Rudna and Polkowice-Sieroszowice mines. At the same time the Company purchases copper concentrates from the market with characteristics suitable for more efficient utilisation of the production capabilities of the smelters and refineries in Poland.

Refined copper in the form of copper cathodes is the end product of the smelting and refining processes, to which the copper standard), and therefore their trading on exchanges and through LME-approved warehouses. Primary commodities exchanges (including the LME and SHFE) enable cathodes to be registered (Grade A type, with a copper content of at least 99.99% under the BS:EN 1978:1998 – Cu-CATH-1 standard), and therefore their trading on exchanges and through LME-approved warehouses. The copper cathodes produced by KGHM are registered on the LME as well as on SHFE, under the brands: HML, HMG-B and HMG-S. Unregistered cathodes are also traded on the physical market (for example those that do not meet quality parameters or the minimal yearly production conditions set by exchanges). One example of unregistered cathodes produced by KGHM are those from the Carlota and Franke mines. The main participants in the cathodes market are mining and smelting companies producing copper in the form of cathodes and wire rod plants and other companies engaged in copper processing, which use cathodes to produce wire rod, other rods, flat bars, pipes, sheets and belts. Similarly as in the case of copper concentrates, trading companies and financial institutions intermediating in the cathodes trade also participate in the market. Total global production of refined copper is estimated by CRU at 23.3 million tonnes in 2020.

Source: CRU, KGHM Polska Miedź S.A.

Source: CRU, KGHM Polska Miedź S.A.

It is a standard practice on the Grade “A” copper cathodes market to add a producer’s premium to the prices set by global exchanges. Its level allows the producer to cover the cost of transport and insurance to the agreed delivery destination, and it also includes the premium for quality (of a given cathodes brand) and supply-demand situation on a given market.

The companies of the Group operate on the cathodes market mainly by selling cathodes produced by the Group’s Polish assets. The Głogów Copper Smelter and Refinery produces HMG-S and HMG-B brand cathodes, while the Legnica Copper Smelter and Refinery produces HML brand cathodes registered on the exchanges in London (LME) and in Shanghai (SHFE). The Group also offers cathodes produced through the leaching and electrowinning process (SX/EW) in the Franke mine in Chile and in the Carlota mine in the United States. Production of refined copper in the Group companies amounted to 560.4 thousand tonnes, which represents approx. 2.4% of global production

Copper wire rod is manufactured in the continuous process of melting, casting and drawing in plants processing refined copper. The material used in this part of the production cycle is mainly copper in the form of cathodes. Wire rod is a half-finished product used in the production of single wires and multiple wires used to produce conducting vines in cables and electric cables (for example: enamelled cable, car cables, power cords etc.). Similarly as for copper cathodes, trading companies are also involved in the physical trading of copper wire rod, apart from companies with wire rod plants and cable-producing companies. The wire rod market, due to the quality characteristics of the product, is more of a local market, which also means that it is highly competitive and demanding. In 2020, total global production of copper in the form of wire rod is estimated by CRU at 16.9 million tonnes.

Source: CRU, KGHM Polska Miedź S.A.

Source: CRU, KGHM Polska Miedź S.A.

Wire rod’s price structure, apart from the copper quotations on the London Metal Exchange, also includes a producer’s fee (added to cathodes) and the refining charges due to the costs of processing cathodes into wire rod. KGHM Polska Miedź S.A. produces wire rod in the Cedynia Wire Rod Plant in Orsk.

Copper rod and wire are used in many sectors of the modern economy and products manufactured from them (cables and wires) represent approximately 60% of global copper consumption. The majority of copper rod and wire (estimated at more than 10 million tons per year) is used in construction and infrastructure. The principal sub-sectors include: power distribution, wiring of buildings and transmission and distribution grids. The most popular products made out of copper wire and rod include: power supply cables, cables in electrical installations of buildings and winding wires (about 70% in total).

In 2020, production of copper rod and wire by KGHM Polska Miedź S.A. reached 259.5 thousand tonnes, which represented nearly 11% of the total output in Europe. This result places the Company among the top European producers of those semi-finished copper products.


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.

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