summary:
Since the U.S. inflation data continued to reach new highs in May, the market seems to be experiencing "tightening panic" again. Sure enough, global liquidity tightened at an accelerated pace in June, and the Federal Reserve raised interest rates by 450 BP and 75 BP in May and June respectively. Copper prices fell rapidly under the pressure of interest rate hikes. LME copper prices fell from US$9,750/ton on June 7 to US$8,947/ton on June 17; SHFE copper prices also fell from 72,930 yuan/ton to below 69,000 yuan/ton. What forces drove such a rapid short-term decline? Are there any structural contradictions in fundamentals? Has the direction of the medium-term trend turned downward? In order to answer these questions, this article gives answers to these questions by scanning the macroscopic background of copper and the changes in the upstream and downstream of the entire industry chain.
1, recent market review
first phase from 2022.1.4 to 2022.2.24. In this stage of , the market's expectations for the Federal Reserve to start an interest rate hike cycle in March have rapidly increased, and LME copper prices have fluctuated around the high level of 9,400-10,200 US dollars/ton; the second stage of is from 2022.2.24 to 2022.3.28. In this stage of , the Russian-Ukrainian war broke out, which disrupted the supply and demand of copper. LME copper hit a record high of US$10,845/ton and then fell back; the third stage of was from 2022.3.28 to 2022.6.5. At this stage, Shanghai is locked down and logistics is blocked. Domestic premiums are high, and the domestic market is strong internally and externally weak. As the U.S. raised interest rates by 50BP in May, monetary policy tightened at an accelerated pace, and coupled with the decline in domestic economic growth in April, copper prices came under pressure and Shanghai copper fell below 69,000 yuan/ton. The turning point of the Shanghai epidemic occurred in mid-May, and the market began to trade in the post-epidemic recovery. Shanghai copper gradually rebounded to 73,000 yuan/ton; the fourth phase of has been from 2022.6.05 to the present. At this stage, the U.S. CPI in May was 8.6%. Inflation data exceeded the March peak of 8.5% and hit a new high again, causing tightening panic in the market. The market generally expects the Federal Reserve to raise interest rates by 75BP in June. On June 16, the Federal Reserve raised interest rates by 75 BP as scheduled, which was in line with market expectations and also showed the Federal Reserve's determination to fight inflation. Copper prices accelerated their decline, with Shanghai copper falling below 69,000 yuan/ton, and LME copper prices falling below US$9,200/ton.
2, supply-side scan - copper concentrate (mine disturbances weaken, new projects will increase production in the second half of the year)
We have calculated the copper production of 19 global large-scale copper mines in 2021 and the first quarter of 2022. . The total copper output of key copper mines in the first quarter of 2022 was 1,876,000 tons. A year-on-year decrease of 2.8% and a month-on-month decrease of 9.4%. The main copper mines that have reduced production year-on-year are Escondida and Collahuasi.
The reasons for the decline in copper production in the first quarter of 2022 are mainly concentrated in aspects such as declining taste, community disturbance, weather, and the new crown epidemic. The contribution to the subsequent production decline of refined copper mines in 2022 mainly focuses on the four mines in Table 1.
In the first quarter of 2022, the mines Escondida, Collahuasi and Los Pelambres located in Chile were all affected by the decline in grade and reduced production. Due to the increase in mining time, the copper ore grades of Chile and Peru , two old copper resource countries, will inevitably decline. Therefore, the problems of these three mines will not be effectively solved in the short term. Las Bambas suspended production for 60 days in the second quarter due to community disturbances. On June 11, MMG ( Minmetals Resources ) announced that Las Bambas would resume production. However, due to complaints about its long transportation route and too many community interest differences around the mine, , so the production situation in the second half of 2022 and beyond is still not optimistic.
Due to the high copper price, there are sufficient projects under construction, put into production and ramping up production in 2022. Figure 3 shows the sources of global copper mine production increase projects in 2022. Among them, Quellaveco and Quebrada Blanca 2 will be put into production in the second half of 2022, and their estimated annual production capacities are 310,000 tons and 250,000 tons respectively. In addition, among the projects that will increase production in 2022, Zijin Mining’s Kamoa-Kakula mine in Congo has set its production guidance this year between 290 and 380 kilotonnes; Freeport’s Grasberg mine in Indonesia and BHP Billiton’s Spence have also In the process of accelerated production. According to the latest copper company financial report data, we have calculated that the expected increase in 2022 for the world's 21 major copper companies totals 528.1 thousand tons, which is 177.5 thousand tons lower than the previous estimate due to disturbance factors. However, overall, the supply in 2022 has improved significantly compared with 2021, and the supply pressure of copper concentrate will gradually increase in the second half of the year.
3, supply-side scan - refined copper (import repair, high smelter profits)
According to ICSG data, global refined copper production in 2021 was 24.83 million tons, a year-on-year increase of 1.1%, and the capacity utilization rate reached 82.6%. Domestic refined copper production accounts for more than 40% of the global share. In March 2021, the utilization rate of refined copper production capacity continued to climb to 85%. The world has basically overcome the impact of the epidemic era on production capacity.
In 2021, due to the situation of external strength and internal weakness caused by differences in fundamentals at home and abroad, the quantity of domestic refined copper imports has dropped sharply. The import volume of refined copper in April 2022 was 270,300 tons, a year-on-year decrease of 10.8%; the cumulative imports from January to April 2022 were 1.1248 million tons, a year-on-year decrease of 4.2%. The main reason for the continued decline in import volume in the first four months of 2022 year-on-year is the logistics obstruction and weak demand caused by the domestic epidemic. As the expectation that foreign economies will enter a recession deepens, the difference in fundamentals between domestic and foreign countries is expected to be restored in the future, and refined copper imports in the second half of the year are expected to have a strong increase.
The benchmark processing fee for copper concentrate long-term orders in 2022 is set at US$65/ton and 6.5 cents/pound, an increase of US$5.5/ton and 0.55 cents/pound compared with 2021. As the supply of refined copper mines continues to improve, spot TC has risen to US$75/ton as of June 10, 2022. According to the current processing fee calculation, it is equivalent to about 3,700 yuan/ton, while the cost of copper smelting in China is 1,790-2,500 yuan/ton. The copper smelting industry is in a profit improvement cycle. In addition, sulfuric acid, as a by-product of copper smelting, is also an important source of income for copper smelting companies. Since the second half of 2020, the price of sulfuric acid has continued to rise to 950 yuan/ton. Compared with its processing cost of 110-200 yuan, sulfuric acid is becoming an important source of profits for copper smelting companies. Taken together, based on the calculation of processing 1 ton of copper to produce 1 ton of sulfuric acid, the current profit of the copper smelter is about 2,300 yuan/ton.
High profits have driven domestic copper smelters to increase their operating rates and production capacity. Domestic refined copper output in the second half of the year is expected to maintain a high growth rate. According to data from SMM, domestic refined copper production capacity will be 13.87 million tons in 2021. In 2022, it is expected to add 760,000 tons of crude refining capacity and 960,000 tons of refining capacity, further increasing production capacity.
4, demand-side scan - global macro (the Fed's interest rate hike drives the macro background to turn suppressive)
According to the Taylor rule, when the inflation rate exceeds 2% or real GDP growth exceeds 2.2%, the Fed will raise the target federal funds rate, and when both If any one of them falls below their respective targets, the Fed will lower the target interest rate. During the fight against the epidemic in the United States in 2020, the Federal Reserve updated the average inflation monetary policy target of 2% , aiming to stimulate economic recovery through zero interest rate monetary policy.
The U.S. core PCE price index recorded 4.9% in April, which is nearly 2.5 times the Federal Reserve’s inflation target. In addition, non-farm employment data also continued to improve. The Federal Reserve officially announced an interest rate hike on March 16, 2022. In May and June, interest rates were raised by 50 BP and 75 BP respectively. As the supplier of the US dollar, the world's common currency, the Fed's decision to fight inflation will not change. Its monetary policy has changed to guiding the core PCE to return to around 2%. Due to the high correlation between copper prices and the US core PCE inflation index, copper prices will also be under pressure to fall.
The U.S. manufacturing PMI in May was 56.1%, an increase of 0.7 percentage points from 55.4% in April. The data showed the overall economy had expanded for 24 consecutive months, following contractions in April and May 2020. The PMIs of the Eurozone and Japan in May were also above the 50% line. China's manufacturing PMI in May recorded 49.6. Although it was 2.2 percentage points higher than the previous value, it was still below the boom and bust line. The domestic economy has been below the boom and bust line for three consecutive months.
Overall, overseas economies PMI are demand-driven but supply-side production is limited, mainly disturbed by the Russia-Ukraine war and the epidemic in China. At present, the overseas post-epidemic recovery effect is gradually fading, and the PMIs in the United States and the Eurozone have shown a trend decline. It is expected that in the second half of 2022, the difference in fundamentals at home and abroad will narrow, and global economic growth will slow down.
5, demand-side scan - domestic demand (no bright spots in traditional consumption areas, domestic economic growth is declining)
According to ICSG data, global refined copper consumption in 2021 will be 24.989 million tons, of which China’s consumption will be 14.229 million tons, accounting for 10% of global consumption With 56% of the total, copper consumption ranks first in the world.In 2020, China's copper terminal consumption demand mainly comes from the fields of power, construction, home appliances, transportation, and electronics, accounting for 46%, 18%, 16%, 11%, and 7% respectively. It can be seen that power infrastructure, real estate and subsequent cycles constitute the main domestic copper consumption demand.
On June 2, State Grid Co., Ltd. (hereinafter referred to as State Grid ) released eight measures to fully serve and solidly stabilize the economy, including increasing investment in the power grid and playing a role in promoting investment. State Grid stated that investment in the power grid will exceed 500 billion yuan in 2022, which is expected to drive social investment of more than 1 trillion yuan. This is the first time that the company's annual power grid investment plan has exceeded 500 billion yuan, reaching a record high and a year-on-year increase of 8.84%. This year, China Southern Power Grid plans to invest 125 billion yuan in fixed assets, 20% more than in previous years. Based on this calculation, the investment amount of the two major power grid companies this year reached 625 billion yuan.
According to National Bureau of Statistics data, the cumulative investment in power grid infrastructure has increased by 3.1% year-on-year, the output of power generation equipment has increased by 8.4%, and the investment in power supply infrastructure has increased by 5.7%. Stable power demand has always been the main supporting factor for domestic copper consumption. According to the latest national policies, power grid investment will see significant growth in the second half of 2022.
According to data from the China Automobile Association, the cumulative domestic automobile production from January to May 2022 was 9.94 million units, a year-on-year decrease of 7.2%. In the context of core shortage and domestic epidemic control, such data is in line with expectations. The subsequent growth rate of automobile production is expected to recover, but the main increase is expected to come from new energy vehicles.
However, domestic real estate and home appliance consumption in subsequent cycles are not optimistic. According to data from the National Bureau of Statistics, the newly started housing area in China from January to May 2022 accumulated 516.28 million square meters, a year-on-year decrease of 30.6%. The weakness of the real estate industry affected the subsequent cycle. The output of household refrigerators fell by 8.1% year-on-year, and the output of air conditioners fell by 0.8% year-on-year. The real estate industry is currently in a state of shrinking supply and wait-and-see demand. It is expected that policy easing will continue to increase in the second half of the year, and real estate-related industries will usher in a certain recovery. However, overall, the downward pressure on real estate is still large, and the demand for copper will bring greater negative impact.
According to wind data, the output of new energy vehicles from January to May 2022 was 2.071 million units, a year-on-year increase of 114.2%, and the cumulative solar energy output was 88.719 billion kilowatts, a year-on-year increase of 12.9%. The cumulative wind power output was 287.3 billion kilowatts, a year-on-year increase of 5.6%. Among them, new energy electric vehicles use more than 90 kilograms of copper, which is 3 to 4 times that of traditional cars. According to the copper demand intensity of photovoltaic installed capacity, the copper demand intensity of offshore wind power is 12,700 tons/GW, and the copper demand intensity of onshore wind power is 4,700 tons/GW. Although the current global copper consumption in new energy, photovoltaic and wind power accounts for only 6%, according to Citibank forecast, the consumption of the new energy industry will increase by 6.7 million tons by 2030, accounting for 8.8 million tons of total consumption growth. 75%. After experiencing high year-on-year growth from a low base, the new energy industry has entered an era of stably contributing to new consumption of copper.
6, demand-side scan - external demand (overseas demand has entered a stable state from strong to weak, with limited increment)
US existing home sales reflect the total sales of built homes in the US. This is a lagging indicator that tracks the U.S. housing market, which is affected by changes in mortgage rates. As market interest rates increase, the U.S. housing market begins to gradually cool down after experiencing a boom during the epidemic. U.S. existing home sales currently stand at 5.61 million units, down from 5.75 million units last month and down from 5.96 million units a year ago. Thousands of sets. -2.43% compared to the previous month and -5.87% compared to 1 year ago.
During the coronavirus disease pandemic, due to the United States' fiscal subsidy policy , residents' disposable income increased significantly, and the purchase of durable goods in the United States increased significantly. In the field of copper consumption, it is reflected in the high year-on-year growth rate of durable goods indexes such as automobiles and their parts, electrical equipment, furniture and home appliances.
At present, the copper consumption field for durable goods in the United States continues to remain strong, and the real estate market is expected to continue to cool down. Overall, overseas demand is in a stable stage. Under the expectation of a global economic slowdown, there is limited room for continued growth.
7, Conclusion and Outlook - What is the driving force for the downward trend of copper prices and its future?
We believe that the core driving force for the downward trend in copper prices in the medium term is the weakening of demand caused by the turn of the global macroeconomic environment and the decline in domestic economic growth. Prices will still fall in the medium term, but supporting factors still exist and prices are expected to fluctuate. The mid-term support level is 58,000-60,000, and the short-term support level is 65,000-68,000.
â–ş Macroscopic shift to suppression
Due to high inflation data, the monetary policies of central banks of most overseas countries have turned to tightening, and interest rate hikes have become this year's theme. As the global supplier of the U.S. dollar, the Fed's decision to fight inflation will not change, and its monetary policy will shift to guiding the core PCE back to around 2%. In addition, the Biden administration has taken frequent actions to fight inflation, including: reducing China's tariffs to stimulate a decline in domestic end consumer goods prices; tacitly allowing Iran and Venezuela to export oil to Europe and planning to visit Saudi Arabia in July; and the Strategic Petroleum Reserve (SPR) provides 45 million barrels of crude oil in the tender;
In short, the United States’ determination to fight inflation will not change, and its policies will gradually increase. Due to the high correlation between copper prices and the US core PCE inflation index, copper prices will also be under pressure to fall.
â–ş Fundamentals turn from strong to weak - weak resonance
From the supply side, high copper prices have accelerated the commissioning of mines under construction and the rapid ramp-up of newly put into operation. The new output of global mines in 2022 is expected to increase significantly. . In addition, the output of mining companies in the first half of the year is expected to be lower than expected. Therefore, in order to complete the annual production guidance, most copper companies are expected to accelerate the mining of copper concentrate in the second half of 2022. The utilization rate of refined copper production downstream of mines remains high. Refined copper imports are expected to rebound in the second half of the year after the fundamental difference between domestic and foreign countries narrows. In addition, high profits drive domestic copper smelters to increase operating rates and production capacity. Domestic refined copper output in the second half of the year It is expected to maintain high growth rate.
From the demand side, the epidemic has had a relatively negative impact on the entire traditional field and the new energy field. The real estate sector and subsequent cycles are the main drag on copper consumption this year. Although power investment and new energy fields have seen steady growth, the decline in domestic economic growth this year is expected to stop or even decline the growth rate of the entire refined copper consumption.
Overall, we estimate that the fundamental pattern this year will be high growth in upstream mining and smelting, and low growth in downstream consumption. The overall refined copper surplus is slightly around 250 kilotons. But there are no obvious structural contradictions.
â–ş Risk reminder: Support factors still exist objectively
1, and the explicit inventory of copper is still at a low level
The price fluctuations and demand weakening expectations in the past year have not allowed us to see a significant accumulation of inventory. On the contrary, the three major exchanges have added The total inventory in Shanghai bonded warehouses decreased by 337,000 tons compared with the same period last year, a year-on-year decrease of -42.8%. The logic of low inventory support is still there. We need to pay close attention to whether refined copper imports and smelter output will allow inventories to rise after the price falls.
2, the Russia-Ukraine war may still continue to ferment
Russia is an important producer of refined copper, accounting for about 4% of global production. Against this backdrop, Western sanctions are expected to have a negative impact on LME copper stocks. The Ukraine crisis will also have a significant impact on the world economy in the short to medium term. The war will increase the demand for copper, disrupt the supply and demand of copper, directly exacerbating the high prices of energy and commodities , as well as further disruptions in supply chains and trade. It will also lead to uncertainty in the copper market, which may drive copper Higher volatility in prices.
This article comes from Huarong Rongda Futures Research Institute
