Source: Refinitiv, KGHM Polska Miedź S.A.
Market environment and trends
Macroeconomic environment
It was also a period in which there was a change in the presidency of the USA. Donald Trump’s control of the White House passed to Joe Biden, who in many areas had strongly different views. They did however agree on the question of the need for further economic stimulus, in particular until such time as the vaccinations programs achieve a level insuring that the risk of subsequent lockdowns is highly limited, and the health care system stabilizes and becomes unburdened. The rebuilding the labour market was recognised as the most important. A similar direction was followed in Europe and Asia, with the differences only coming from the details of the stimulus applied. Together with numerous fiscal incentives, the world’s economies were stimulated by a monetary impulse.
In the first months of 2021, central banks continued to maintain low interest rates and continued to print money. A change in rhetoric came in the second half of the year, when the situation on the labour markets and in the economy began in many countries to return to a pre-pandemic state. The supply of energy commodities was reduced by reluctance towards new investments, given the rapid rise in demand resulting from emergence from the pandemicinduced restrictions in the global economy, led to a jump in the prices of energy commodities. In Europe the problem was worse due to rising geopolitical tensions. At the same time, strained or frequently severed supply chains along with consumer demand pushed by strong fiscal and monetary stimulus resulted in a destabilisation of prices around the world. Both the producer price index (PPI) as well as the consumer price index (CPI, which includes base inflation) soared, leading to substantially higher global inflationary expectations. After several months, the representatives of central banks took action, aimed at the gradual discontinuance of quantitative easing programs or the commencement of a cycle of interest rate hikes. Representatives of the American Federal Reserve, the world’s largest monetary institution, began to restrict quantitative easing (QE) with a target of ceasing purchases of assets in March 2022. At the end of the year, the central banks of England and Switzerland raised interest rates, and a similar reaction was witnessed by central banks in CentralEastern Europe and in many other emerging economies in the world. The increase in interest rates was initiated by developing countries. The jump in inflation rates in these countries also resulted in a rapid normalisation of monetary policy parameters. Following decisions that were taken primarily in the last quarter of the year, in many cases the level of interest rates is already higher than prior to the announcement by WHO of the global pandemic.
The results of the United States’ economy in 2021 was estimated at 5.6% (-3.4% in 2020), while the increase in economic activity in the eurozone is 5.2% year-to-year. The rate of growth in China in 2021 was estimated at 8.1%, accelerating from 2.3% in 2020. In the World Economic Outlook published in January 2022, the IMF’s economists assessed the increase in global GDP by 0.5 percentage points less than in the autumn report. The updated outlook results to a large extent from a lowering of the rate of growth in the world’s two largest economies: the USA and China, whilst amongst the arguments for reducing the rate of growth are the rapid spread of the omicron variant, the strains on supply chains, rising energy commodities prices, higher inflation and slower than previously expected consumer demand in China.
Forecasts of real GDP growth per the International Monetary Fund from january 2022 versus previous forecasts
Forecast (F) of actual GDP growth – International Monetary Fund – Economic Outlook –January 2022 compared to October 2021; for Chile data from October 2021, compared to July 2021; Source: KGHM Polska Miedź, International Monetary Fund
In terms of the commodities market, several events and turning points are worth noting. The necessity to carry out the green revolution put forward by several institutions and the role that copper will play, led to attention being focused on the red metal by many market participants (producers, consumers, commercial companies and investors). The start of the year did not see a continuation of the upward price trend that began in 2020. Nevertheless, unflagging demand, financial investor interest and subsequent declarations on achieving emissions neutrality not only by various governments, but also by individual companies, provided a signal for further price rises. A key moment was the declaration by China of the intention to achieve emissions neutrality, a country which in the past had frequently avoided the subject of reducing polluting emissions. Also positively received were the pollution reduction goals announced by the new administration of Joe Biden. The situation thus reached a turning point, as both countries had for decades been amongst the world’s highest emitters of carbon dioxide.
Macroeconomic factors significant for the operations of the KGHM Polska Miedź S.A. Group – average prices*
| Unit | 2021 | 2020 | Change (%) | 4Q’21 | 3Q’21 | 2Q’21 | 1Q’21 | |
|---|---|---|---|---|---|---|---|---|
| Copper price on the LME |
USD/t | 9,317 | 6,181 | +50.7 | 9,699 | 9,372 | 9,700 | 8,504 |
| Copper price on the LME |
PLN/t | 36,017 | 23,975 | +50.2 | 39,166 | 36,303 | 36,438 | 32,115 |
| Silver price per the LBMA | USD/oz t | 25.14 | 20.54 | +22.4 | 23.33 | 24.36 | 26.69 | 26.26 |
| Molybdenum price per the CRU |
USD/lb | 16.18 | 8.90 | +81.8 | 19.74 | 19.81 | 13.93 | 11.25 |
| USD/PLN exchange rate per the NBP | 3.8647 | 3.8978 | (0.8) | 4.0421 | 3.8740 | 3.7611 | 3.7752 | |
| USD/CAD exchange rate per the Bank of Canada | 1.2535 | 1.3415 | (6.6) | 1.2603 | 1.2600 | 1.2282 | 1.2660 | |
| USD/CLP exchange rate per the Bank of Chile | 759 | 792 | (4.2) | 826 | 771 | 715 | 724 |
* arithmetic average of daily quotations
Over the course of the year quite a number of interesting events occurred on the copper market. Due to concerns about an increase in the number of infections related to the mass movement of people during the Chinese New Year, Chinese authorities decided to suspend work in production facilities. This led to an above-average for the period increase in copper demand. The usual accumulation of inventories did not occur, as material was continually processed. At the same time demand for copper also rose in highly-developed countries, which were emerging from the pandemic-induced restrictions. Financial investors were stimulated to act by analytical reports of investment banks, in which analysts raced one another as regards price forecasts for the coming years.
The dynamically-rising price caused concern, however, in the Chinese authorities as to the sustainability of the economic rise and the cost of functioning of the economy. Consequently, following numerous verbal interventions, the Chinese authorities decided to release some of the metal stored earlier by the State Reserves Bureau (SRB), which until then had occurred very infrequently. Despite the volume of metal sold being lower than expected, several auctions sufficed to quench the rise in the red metal’s prices bring balance to the market, mainly the domestic one. The deficit of metal faced by the market’s participants can be seen in information presented by the International Copper Study Group, which estimates that in the first eleven months of 2021 the copper market was in a state of deficit at the level of 339 thousand tonnes. The deficit in the whole year 2021 was estimated by the same institution at 42 thousand tonnes. It must be noted however that these data are based among others on so-called apparent demand in China, meaning data reflecting net imports together with production, but excluding changes in warehouses, and therefore could be underestimated. On the other hand, a number of financial institutions as well as those specialising in the metals market have estimated a somewhat higher deficit on the copper market in 2021, on average at a level of around 125 thousand tonnes.
Taking into consideration the portfolio of mine projects, it is highly probable that over the next several years a substantial amount of new material will enter the copper market. Most of the mine production which soon will be made available will come from projects which are currently in the final phase of realisation. It should however be noted that there are several events which may significantly impact the fundamental situation on the market over the long-term. In jurisdictions which until now have accounted for the world’s largest copper reserves, such as Peru and Chile, political changes have occurred whose consequences could increase uncertainty in the conduct of the mining business in subsequent years. A political turn to the left in these countries could mean a less predictable investment climate and a desire for higher taxation in order to equalise social well-being. It should also be noted that the desire to tax the mining sector is taking on a global character. Likewise, trends in climate policy do not support the advancement of expensive and complex investment projects. Arguments predicting another commodities super-cycle espoused by certain investment banks proposed, among others, that current prices have to rise and maintain a high level in order to motivate mining companies on the one hand to commit to more difficult investments, and on the other to increase their recycling activities.
Strong demand for copper led to a substantial draining of inventories in the fourth quarter of 2021. LME warehouse levels fell to a historic low, resulting in substantial volatility of forward curves and an immense level of backwardation (over 1000 USD/t on the intraday scale), meaning a market where futures contract prices for subsequent periods are lower than spot prices. This market condition resulted from the fears of its participants about the availability of material, as a result of which the red metal was/is worth more „today” than „tomorrow”. In subsequent weeks the market situation calmed, among others thanks to the intervention of the LME authorities. Nonetheless, the level of inventories remains substantially lower than the historic average, while the forward curve until the end of the year continued to unremittingly reflect the fears of market participants, maintaining deep backwardation.
The average annual price of copper (cash settlement on the LME) in 2021 amounted to 9,317 USD/t. The highest price was recorded on 10 May. At that time it amounted to 10,724.50 USD/t, and set a historic record. The lowest level was recorded on 2 February. On that day the price of the red metal amounted to 7,755.50 USD/t. Taking into consideration the cash settlement price, copper rose by 22% in the previous year (the closing price on the first versus last day of the year). It is also worth noting that 2021 was also a record year in terms of copper prices denominated in the Polish złoty. The average price in the previous year amounted to 36,017 PLN/t (daily LME prices calculated after the NBP fixing).
Source: Bloomberg, KGHM Polska Miedź S.A
The turn of January and February last year was a period when silver took centre stage on the financial market. Following a speculative upturn on the shares of the company Gamestop, this metal turned out to be another target of the speculative insurgency of investors associated on the internet forum Reddit. The intention of individual investors was to enforce the closing of supposedly enormous short positions of investments banks out of the market (a so-called short squeeze). The main instrument used for this purpose turned out to be derivatives, which was mostly felt by the options market, whose parameters
remained unsteady for many weeks. Following these events, the price of silver briefly broke the 30 USD/oz t level (marking the maximum yearly price in the continuous trading system of 30.03 USD/ oz t), following which in subsequent months its value systematically decreased. The minimum was reached at the end of September and amounted to 21.39 USD/oz t. Contrary to historic dependencies, the price of silver (and also gold) did not react to heightened expectations or global inflation. Evident instead were the impact of fears about the sustainability of growth and the change in monetary policy, which, after February’s price jump, led to a drop in interest in precious metals as well as a decrease in warehoused silver and gold in ETFs. The continuation of global interest rates at record low levels held back investor interest in precious metals. The price of silver ended 2021 at around 23.10 USD/oz t. The average price of this metal according to the London Bullion Market Association (LBMA) in 2021 rose by around 22% and amounted to 25.14 USD/oz t versus 20.54 USD/oz t in 2020.
Source: Bloomberg, KGHM Polska Miedź S.A
The price of molybdenum rose systematically during the year, reaching its maximum price in September, and for several weeks remained above 20 USD/lb. Increasing demand for steel containing molybdenum (FeMo; in China +12% year-to-year) together with fears about metal supply being lower due to logistical interruptions and restricted mine production led to multi-year highs being reached. In the fourth quarter of the previous year prices recorded a slight decrease, mainly due to fears about demand being affected by an energy crisis impacting the stainless steel production. The average price of the metal in 2021 amounted to 16.18 USD/lb and was 82% higher than the average for 2020 (8.90 USD/lb).
Source: CRU, KGHM Polska Miedź S.A.
Quotations of the Polish złoty, both in comparison to the euro as well as the American dollar, continued to be under the influence of the heightened volatility extent for some time on the financial markets. Currency interventions at the end of 2020 by the National Bank of Poland (NBP) aimed at maintaining a favourable PLN exchange rate for Polish exporters, were meant to anchor market participants at the start of 2021 around the level desired by the NBP. Subsequent weeks showed however that the situation on the currency market may turn out to be far from stable. At the start of June 2021 the Polish złoty reached its minimum versus the euro (approx. 4.45) and the American dollar (approx. 3.65). In subsequent months centre stage was taken by the conflict between Poland and the European Commission and rising prices in the economy with a continuation at the same time of the existing monetary policy chosen by the Monetary Policy Council. A change occurred in the fourth quarter, when the NBP unexpectedly altered its rhetoric, raised interest rates and continued to tighten monetary policy in subsequent months. The PLN exchange rate reached its highest level versus the euro and the USD in November, at the levels respectively of approx. 4.72 and approx. 4.19. The PLN ended 2021 at around 4.06 to the USD (NBP fixing of 31 December 2021). The average USD/PLN exchange rate (per the NBP) in 2021 amounted to 3.8647 and was lower by 1% than in 2020 (3.8978 USD/PLN).
Source: Bloomberg, KGHM Polska Miedź S.A.
Despite subsequent waves of coronavirus infections and the associated restrictions introduced by the government, the Canadian economy is returning to growth. This does not however alter the fact that after three quarters GDP remains below the level of 2020. As regards the question of monetary policy, in November the Canadian central bank ended its quantitative easing program, while inflation, which remains above the target level (1-3%), is slowly leading to a change in monetary policy rhetoric and increases the likelihood of interest rate hikes. In 2021 the Canadian dollar recorded a slight strengthening versus the American dollar, taking into consideration the quotations of this currency pair in the first and last days of the year. The average USD/CAD exchange rate (per the Bank of Canada) in 2021 amounted to 1.2535 and was 7% lower than the rate recorded in 2020 (1.3415).
Source: Bloomberg, KGHM Polska Miedź S.A
Events in Chile in 2021 were mainly dictated by the electoral calendar. Since the mass protests of 2019 the citizens of Chile have expected changes in their constitution, which in consequence led to the victory of the leftist candidate Gabriel Boric. A substantial challenge for the mining industry will be the further evolution of tax law and the direction of new legislation. The first draft act and the copper mining taxation it contained met with substantial opposition by the industry’s representatives and resulted in continued negotiations. If the current wording of the act is adopted, it is highly probable that
the attractiveness of investing in copper resources-rich Chile in terms of new mining projects will be substantially decreased. These fears to a large extent have been reflected in the price of copper which is significant not only for the country’s balance of payments, but also for the USD/CLP exchange rate, which during the year systematically weakened. The average annual USD/CLP exchange rate (per the Bank of Chile) in 2021 amounted to 759, meaning a strengthening of the local currency as compared to the USD by 4% (792 in 2020).
Source: Bloomberg, KGHM Polska Miedź S.A.
Macroeconomic conditions at the start of 2022
The start of 2022 was rich with another batch of events of significance for the global economy. Though the world is dealing with the highlycontagious omicron strain, a regional director of the World Health Organisation (WHO) stated at the end of January that it is highly probable that the end of the pandemic in Europe is in sight. The level of vaccinations amongst society and resistance gained from enduring the disease is leading an increasing number of European countries to ease or completely remove restrictions. While this is a positive signal for economic activity, the coronavirus remains a threat to the continuity of international supply chains and continues to be a cause of potential interruptions to commercial trade
The global economy continues to deal with an energy crisis which, given limited capacity to increase supply, is driving up energy prices. These in turn, given supply chains for other goods which remain strained and thanks to strong consumer demand, are causing higher inflation on the global scale and are driving up costs. Rising costs are increasingly perceptible in subsequent links of the global economy. Moreover, in response to rising prices and the risk of inflation expectations getting out of control, central banks are further tightening the monetary policy. The question being posed by market participants is not whether the leading central banks will raise interest rates, but what the scale of the tightening will be and the impact of these hikes on global economic activity.
There has been no decrease in doubts as to the further development of the situation, while the events in eastern Europe and the Russian invasion in Ukraine are not facilitating an assessment of the market environment. Particularly in the context of energy carrier prices, and amongst these natural gas, whose primary supplier to Europe is Russia. There also appeared aboveaverage volatility on the currency market. The weakening currencies of countries in our region, in combination with the jump in energy commodities prices, are driving inflation, which already at the turn of the year was the highest in many years. An additional problem for European industry are the rising costs of European CO₂ emission rights certificates, which in recent weeks have been marking new price records. The increase in the prices of these certificates may lead to discussions on a broader scale and is leading to actions aimed at reforming the system and perhaps restricting speculative activities. The impact of the war in Ukraine on the European and global economy is difficult to assess at this time, but problems with the supply of numerous products, including steel, as well as serious interruptions in the production and export of agricultural products, may have serious social and economic repercussions.
Analysis of the global market for the group’s basic products
The primary products offered by the companies of the KGHM Group are concentrates, cathodes and copper wire rod. 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 the stock exchanges in New York (COMEX) and the Shanghai (Shanghai Futures Exchange -SHFE). Grade “A” type refined copper cathodes, with a copper content of at least 99.99%, are quoted on the LME (under the standard BS:EN 1978:1998 – Cu-CATH-1, the standard sets the maximum level of impurities for Cu-Cath-1 copper at 0.0065%). In order to be able to apply stock exchange prices to purchase/sale transactions of the products to which this quality standard is not applied (i.e. all types of copper-bearing materials such as 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 makeup, 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 concentrates
Copper concentrate is a product made by processing and enriching copper ore, which usually has a relatively low metal content and is not suitable for direct metallurgical processing. Usually, copper content in concentrate varies from percentages in the teens to several tens of 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 as well as the by-products of processing (mainly precious metals, sulphuric acid, lead etc.). The main participants of the concentrate markets are mines supplying the product on the market and smelters and refineries, for which the concentrates are materials for production. Trading companies also play a role in the international trading, intermediating in the purchase/sale transactions and offering additional services expected by the parties. In 2021, the total global production of copper in copper concentrate is estimated at 17.4 million tonnes (according to CRU).
Copper concentrates require processing into refined copper, which leads to incurring processing costs and the incomplete recovery of metals at 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).
Companies of the KGHM Group participate in the copper concentrate markets mainly by selling concentrate from Sierra Gorda in Chile and from Robinson in the USA. At the same time KGHM purchases copper concentrates from the market with characteristics suitable for more efficient utilisation of the production capabilities of the smelters and refineries in Poland.
Copper cathodes
Refined copper in the form of copper cathodes is the end product of the smelting and refining processes to which the copper-bearing materials are subjected (including concentrates, copper blister, anodes and copper scrap). 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 and SHFE as well as on INE, 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 the Carlota and Franke brands. 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. In 2021, CRU estimated total global production of refined copper at 24.3 million tonnes.
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 KGHM Group participate on the cathodes market mainly by selling cathodes from the Group’s Polish assets. The Głogów Copper Smelter and Refinery produces cathodes of the HMG-S and HMG-B brands, while the Legnica Copper Smelter and Refinery produces cathodes of the HML brand, registered on the exchanges in London (LME) and in Shanghai (SHFE). Moreover, the KGHM Group offers cathodes produced through the leaching and electrowinning (SX/EW) process in the Franke mine in Chile and in the Carlota mine in the United States. Production of refined copper in KGHM Polska Miedź S.A. amounted to 577.6 thousand tonnes, which represents approx. 2.4% of global production.
Copper wire rod
Copper wire rod is manufactured in the continuous process of melting, casting and drawing in plants processing refined copper. The material used in this production cycle is mainly copper in the form of cathodes, although higher-grade copper scrap may also be used. Wire rod is a half-finished product used in the production of single wires and strands used to produce conducting cores in cables and electric wires (for example: enamelled cable, car cables, power cords etc.). Similarly as for copper cathodes, trading companies are also involved in trading of half-finished products, apart from companies with production facilities (wire rod plants and companies processing wire rod into cables and bundled wires). 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 2021, total global production of copper in the form of wire rod is estimated by CRU at 19.3 million tonnes.
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 wire rod and wires are utilised in numerous sectors of the modern economy, while the products created from them (cables and bundled wires) account for approx. 60% of world copper consumption. The vast majority of wire rod and wires (estimated at over 10 million tonnes annually), is used in construction and infrastructure. Amongst the most popular products manufactured from wire rod and wires are power lines, cables in the electrical installations in buildings and winding wires (together approx. 70%).
In 2021, production of wire rod and cable by KGHM Polska Miedź S.A. amounted to 281.9 thousand tonnes, or nearly 11% of European production. This result makes the Company one of Europe’s leading producers of these copper half-finished products.
Approx. 73% 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 the latest technological solutions, among others in infrastructure, the automotive industry and photovoltaics. In total, industry utilises approx. 50% of global silver production. It is also a valued investment metal. According to Metals Focus preliminary estimates, in 2021 global production of mined silver amounted to 25.8 thousand tonnes.
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 sells 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 2021, KGHM produced 1,332 tonnes of silver, making the Company one of the world’s leading producers of silver. This metal in the form of bars is registered under the brand KGHM HG and has a registered certificate on the New York Exchange COMEX as well as Good Delivery certificates issued by the London Bullion Market Association. Silver is supplied in the form of grains to the jewellery and metals industries, which produce alloys containing silver. Silver in the form of bars (ingots) is mainly purchased by financial institutions and industry.