1．Copper Inventory in Domestic Bonded Zone Down 28,800 mt

  Copper inventories in the domestic bonded zones decreased 28,800 mt from March 18 to 302,600 mt as of Friday March 25, according to the most recent SMM survey. Inventory in the Shanghai bonded zone decreased 27,200 mt to 266,300 mt, and inventory in the Guangdong bonded zone dropped 1,600 mt to 36,300 mt. The decrease of inventory in the bonded zone this week was contributed by the obvious increase of shipment and the concentrated exports of Russian copper of a large trader to overseas warehouses for delivery. As for arrivals, due to the influence of logistics, the exports of domestic smelters were not smooth, and the number of goods that flew into the bonded zone was limited.

 

 

 

 

 

2、Domestic Copper Cathode Inventory at Historical Low, Likely to Fall Further in April

March is coming to an end. According to SMM statistics as of March 25, the domestic copper inventory (including bonded area) is only 451,400 mt, down 52,500 mt from last Friday and 248,500 mt lower than the same period last year.

The domestic inventory pivot post the Chinese New Year comes the earlies in 2022 in the past five years. Why? The reasons are as follows:

Supply

Although domestic copper cathode output in February was 835,700 mt, an increase of 13,900 mt year-on-year. But the output in March is expected to fall both MoM and YoY as a smelter suddenly curtail the production significantly. In addition, affected by the pandemic, many domestic smelters have been restricted in terms of shipment of finished products, with some manufacturers shipping only 60% of the normal level. This was also reflected in the low arrival of goods at the warehouses in Guangdong.

Affected by the price difference between SHFE and LME copper, the unfavourable SHFE/LME price ratio has kept copper imports low. The export market, on the contrary, has been profitable and many smelters are actively exporting.

Demand

After the Chinese New Year, the resumption of production across all industries was later than last year as workers returned later than last year (last year local governments called on migrant workers to stay put for CNY holiday). In late February and early March when consumption finally picked up a little bit, the economically developed areas such as the Yangtze River Delta and Pearl River Delta regions have been severely hit by a new round of pandemic in March, containing the consumption again.
In February, due to the large price difference between copper cathode and copper scrap and sufficient copper scrap supply, China's copper scrap imports stood at 272,700 mt in January and February, a YoY increase of 42.2%. Quite a large amount of copper scrap was used to substitute copper cathode in February.

However, in March, the supply of imported copper fell significantly due to great import losses. On the other hand, by the impact of the new VAT policy Document No. 40, many domestic secondary copper rod factories were forced to reduce the production due to lack of raw materials. And downstream cable factories mostly used copper cathode rod in March.

To sum up, domestic copper inventory started to fall earlier in 2022 after the CNY holiday mainly due to falling supply rather than booming consumption.

SMM believes that the supply is unlikely to improve significantly in April due to more maintenance in the month apart from the above two facets.

Nonetheless, the consumption is likely to recover significantly in mid or late April for the following reasons:

1. The Chinese government has set an annual GDP growth rate of 5.5% for 2022. The quarterly GDP growth was already low in 1Q and must be caught up in 2Q;

2. After the Chinese New Year and especially after the Two Sessions, local governments across China have already introduced a series of infrastructure projects to stabilise the economy, and we expect these projects to start in April. Moreover, the senior management has already released a gust of warm breeze to the real estate market, and banks have also lowered their lending rates and lent money at a significantly faster pace, and these policies are expected to pay off after April;

3. Investment in power grids is accelerating, with January-February grid investment amounting to 31.3 billion yuan, a 37.89% year-on-year jump, according to CEC data;

4. The announcement by the US at the end of March to re-exempt 352 items of Chinese imports from tariffs, in addition to the recent signs of devaluation of the RMB, which will benefit exports;

5. The supply of secondary copper will remain tight in April, which will benefit consumption of copper cathode;

6. There may even be a small wave of pre-holiday restocking in late April.

As such, domestic inventory is expected to fall further in April amid falling supply and rising demand.

 

 

3、SMM Survey of Copper Downstream Sectors amid Escalated COVID Controls

With the escalation of pandemic controls in various regions, copper downstream consumption has taken a hit. SMM has surveyed copper processing companies under the influence of rising copper prices disruptions from the pandemic.

Wire and cable: Consumption remained weak this week, and new orders showed signs of decline. Continuously rising copper prices discouraged end users from placing orders. The pandemic in many regions has not been effectively controlled, putting financial pressure on wire and cable companies. Companies were forced to focus on sales to nearby customers. The pandemic also hindered the shipments of finished products and raw materials. Some producers had to delay their deliveries and slowed down production.

Enamelled wire: The pandemic continued to hurt the consumption of enamelled wire, and the orders fell from the same period in previous years. Orders in Dongguan and Shenzhen improved after the COVID-induced lockdowns were lifted. However, the pandemic situation in Jiangsu and Zhejiang was severe. Changzhou, Shanghai, Kunshan and other regions stepped up pandemic containment measures, forcing many companies to stop production. Small and medium-sized companies were the most affected.

 

 

 

 

4、Copper Inventory Pivot Surfaced Earlier Than in Previous Years, Fat Chance for Arbitrage

China copper inventory pivot surfaced earlier than in previous years post the Chinese New Year (CNY) holiday. And the spot-futures spread also changed from contango to backwardation amid low global inventory.

As of Monday March 21, SMM domestic copper inventory across major markets in China totalled 162,600 mt, down 9,900 mt from Friday March 18 and 44,300 mt from last Monday March 14, which marked the pivot for domestic copper inventory. The inventory as of this Monday added 63,900 mt from the pre-CNY holiday level of 98,700 mt.

In details, the inventory in Shanghai and Guangdong dropped 5,900 mt and 2,500 mt respectively to 100,200 mt and 45,300 mt over the recent weekend. While the inventory in bonded zone rose only 7,800 mt to 331,400 mt.

There are three reasons for the early presence of inventory pivot.

1. As a result of the Russia-Ukraine conflicts, overseas concerns about market supply as well as inflationary pressures greatly heightened LME copper, hence SHFE/LME copper price ratio stood low, meaning the import losses were huge, which hindered copper imports. In this case, some large smelters embarked on exports, and some even exported their cargos to LME warehouses.

2. With the recent outbreak of the pandemic in many places in China, the efficiency of shipments has been significantly reduced, with some sources forced to pile up in the factories. Although the downstream is also disturbed by the pandemic to some extent, and the consumption has turned weaker, the impact on the supply side is clearly greater than on the demand side. In addition, a domestic smelter in Shandong is under financial pressure, with substantial production cuts being the solution, aggravating supply concerns.

3. The cost efficiency of copper scrap has weakened significantly after Document No. 40 (new VAT policy) took effect on March 1, and most participants in the scrap market are wait-and-see, which shores up the consumption of refined copper and contributes to the falling copper inventory.

As such, frequent supply side issues on the back of historical low inventory strongly support the near-term bullish outlook. The futures market is also expected to re-stage the great backwardation structure seen in Q3 and Q4 in 2021.