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SMM believes that copper prices will be under pressure in the second half of 2022, with copper scrap supply tightness expected to be a major resistance to falling copper prices, and the pace of US interest rate hikes is also expected to interfere with the downward trend of copper prices. In addition, whether the increase in copper cathode production can meet expectations is also worth of market attention.
Copper fundamentals
Copper concentrate supply expected to stay sufficient in the second half of 2022
Copper concentrate TCs have risen all the way to around $80/mt since last year, and corrected with the reduction in production of overseas copper mines. However, after the smelters in Shandong resumed the production, TCs dropped to around $75/mt as of last week. SMM believes that the TCs are likely to drop significantly in the second half of the year with rising yield from copper mines.
Copper cathode output growth fell short with intensive smelter maintenance and unexpected production suspension
A number of domestic smelters carried out maintenance in a centralised manner, which, coupled with the production suspension of smelters in Shandong, pulled down copper cathode output to the second to the lowest level in May since the beginning of the year. And the annual copper cathode output estimate may be revised down with the slower-than-expected commissioning process of new capacities.
Copper cathode imports stood low with rare import chances in the first half of the year
Copper cathode imports were low due to lingering import losses. The opening of the export window has prompted domestic smelters to actively export copper cathodes to the bonded zones or overseas warehouses, further exacerbating the supply tightness in China.
Risk event suppressed market animation despite the lift of COVID lockdown in Shanghai
Nearly 70% of China's copper cathode imports enter the country through the Shanghai Customs, and nearly 80% of China's copper cathode social stocks are stored in Shanghai (including the bonded zinc). With the resumption of work and production in Shanghai from the last round of COVID breakout, spot circulation has gradually returned to around 80% of the normal level. However, the non-ferrous market is hit by a credit crisis again after the scandal of repeated pledge of the aluminium ingot in a social warehouse, and copper trade has been damaged as well.
Social inventory still at multi-year low
Total domestic social stocks have been falling since March and have been at historically low, playing a significant role in supporting the backwardation of SHFE spread as well as the spot premiums. With the expectation of supply growth priced in partially (mainly due to the production resumption of smelters in Shandong), the social stocks may have bottomed, coupled with the marginal recovery of consumption.
Copper scrap supply tightness also contributed to falling social stocks
Copper scrap recycling and relative production has been disappointing during the latest round of COVID breakout, and traders have had insufficient inventory after the up cycle last year, and copper scrap supply becomes more vulnerable. Copper scrap supply tightness is also evident based on the differences concerning weekly operating rates of copper rod that use copper cathode and scrap as the raw material. In addition, high secondary copper rod prices caused by tight supply of scrap have contained the orders.
Market consumption weakened due to the spreading COVID, eyes on the materialisation of stimulus packages
The air conditioning operating rates affect the copper tube sector, with production at a low level. The air conditioning export data is not satisfactory, and the future demand is also pessimistic. Copper plate/sheet operating rates are low, but the recovery situation is better than the copper cathode rod sector. Copper wire and cable operating rates are also below the level of the same period in previous years.
Spot supply in the Europe and US has been tight
LME copper inventory dropped significantly after the centralised export of Chinese copper, especially in the Europe. The supply of spots are even tight with local smelters under maintenance in the second quarter. Spot premiums in Europe and the US have been rising amid tight transport capacity and logistics costs.
Market prospect
SMM believes that copper prices will be under pressure in the second half of 2022, with copper scrap supply tightness expected to be a major resistance to falling copper prices, and the pace of US interest rate hikes is also expected to interfere with the downward trend of copper prices. In addition, whether the increase in copper cathode production can meet expectations is also worth of market attention.
The average operating rate of key domestic copper rod plants stood at around 67.08% last week, up by 7.88 percentage points from the previous week, but down by 2.6 percentage points from the same period last year. (Note: SMM surveyed 20 producers with a total production capacity of 7.47 million mt.) Higher operating rates of copper cathode rod producers last week (June 11-June 17) were aroused by the sharp drop in copper prices that resulted in strong downstream restocking demand. At the end of last week, the increase in orders and sales raised the operating rates. Besides, the spread between the copper cathode and copper scrap narrowed sharply as the copper prices fell rapidly. According to SMM data, premiums of secondary copper rods in Jiangxi were 460 yuan/mt over the SHFE 2207 copper contract, losing its price advantage. Wire and cable companies preferred the copper cathode rods.
Generally speaking, higher operating rates of copper cathode rod producers were stimulated by the drop in copper prices and the narrow spread between the copper cathode and copper scrap. However, the consumption did not improve significantly, especially the demand from enamelled wire rods. If copper prices continue to drop this week, the downstream consumption may be stimulated, thus further boosting the operating rates of copper cathode rod producers. So far, it is difficult for the operating rates to recover to the peak season level under the background of a declining real estate industry and traditional power grid and slack consumption of terminal industries such as home appliances.
In the futures market, LME copper opened at $9,116/mt yesterday and rose to $9,168.5/mt after dropping to $9,020/mt. At last, the prices closed at $9,126/mt, down 0.89%. Trading volume was 20,000 lots, and open interest stood at 231,000 lots. SHFE 2207 copper contract opened at 69,820 yuan/mt in overnight trading and rebounded from a low of 96,150 yuan/mt. At last, the prices closed at 69,520 yuan/mt, down 1.78%. Trading volume was 14,000 lots, and open interest stood at 135,000 lots.
On the macro front, (1) The Bank of England raised the interest rates by 25 basis points to the highest level since 2009 and hinted that it would take stronger action to curb inflation if necessary. (Bearish ☆) (2) On June 16, local time, the three major indexes of US stocks closed down sharply. The Dow fell by 2.42%, closing below 30,000 points for the first time since January 2021. Nasdaq fell by 4.08%, creating the lowest level since November 2020. The S&P 500 index fell by 3.25%, hitting the lowest since late December 2020. (Bearish ☆) (3) The US announced that it would impose new economic sanctions on Iran, and energy prices rose, with US oil up by 1.52% and Brent Crude up by 0.44%. (Bullish ☆)
In the spot market, (1) Shanghai copper cathode spots were quoted at premiums of 260-300 yuan/mt yesterday, and the average premium was 280 yuan/mt, up by 15 yuan/mt from the previous day. On the first day after the delivery of the 2206 contract, traders were still looking for opportunities to restock, intending to suppress the premiums. However, the goods-holders refused to reduce their prices. Recently, the SHFE/LME price ratio has risen to around 7.65, and the import window opened many times. Therefore, the sources of spots were not tight, and the cargo holders could hardly hold firm to their prices. For the traders and downstream, the premiums of 250-300 yuan/mt were high.
(2) In the south China market, On June 16, premiums of the #1 copper cathode spot in Guangdong were 30-80 yuan/mt. The average premium was 55 yuan/mt, down by 25 yuan/mt from the previous trading day. Inventory in Guangdong declined slightly as the arrival decreased after the smelters finished the delivery. In the early trading, the cargo holders still held firm to the prices, and the premiums of high-quality copper stood at 50 yuan/mt. However, the market was still very quiet, especially in the small orders market. Most traders were still worried about the problem caused by the warehouse incident, and they were not active in restocking and only purchased on rigid demand. Therefore, the cargo holders had to cut their prices to ship. Generally speaking, the decline in inventory could not prevent the premiums from falling as the market trading was slack.
(3) Imported copper: On June 16, Yangshan copper premiums were quoted at $58-74/mt under warrants. The average price was $66/mt, $3.5/mt higher than the previous trading day, with the quotation period of July. Quotes under B/L stood at $50-67/mt. The average price was $58.5/mt, flat from the previous trading day, with the quotation period of July. The quotation refers to the prices of goods arriving at ports in late June and early July. The discounts of LME 0-3 were $5.5/mt. The import losses were around 250 yuan/mt over the 2207 copper contract as of 10 a. m. yesterday. The spot imports remained profitable, and the import losses over the 2207 copper contract narrowed to around 250 yuan/mt in the early trading. The rising price ratio attracted more inquiries this week. Besides, the high spot premiums in China enabled the traders to hold firm to the prices. According to the survey, the logistics conditions improved, and the operation in warehouses became normal. Profits of spot imports boosted the inquiries of warrants. The high-quality copper was quoted at $74/mt under warrants, and the domestic pyro-copper was quoted at around $65-70/mt. The traded price of a domestic pyro-copper was $67/mt, and that of the hydro-copper stood at around $58/mt. The prices of high-quality copper under the bill of lading arriving at ports in early July stood at $75/mt, and these of mainstream pyro-copper were $72/mt However, the market had seen no transactions yet.
(4) Inventory: On June 16, LME copper inventory decreased by 525 mt to 121,000 mt. The copper inventory in SHFE increased by 1,798 mt to 21,343 mt.
Price forecast: The data showed that the number of jobless claims in the US fell less than expected at the beginning of last week, but the labour market remained tense. The Fed's sharp interest rate hikes weakened the related economic data overseas, and the positive efforts made by the Fed to slow down demand and reduce the inflation rate to 2% may have begun to show results. At the same time, the market's worries about the economic recession have intensified, and non-ferrous metals were under huge pressure. LME copper will trade between $9,030-9,130/mt today; SHFE copper prices are expected to move between 69,100-69,700 yuan/mt. Spot premiums are likely to fluctuate between 200-300 yuan/mt.
Two weeks ago, the US CPI growth in May reached a 40-year high of 8.6% YoY, and the Fed decided to raise the interest rates by 75 basis points, which made the US dollar index soar to a 20-year high of 105.79. The European Central Bank planned to raise the interest rates by 25 basis points in July and is going to raise the rates by 50 basis points in September, indicating greater inflation expectations. European and the US stock markets suffered huge pressure, so the industrial products fell last week. In China, the National Standing Committee continued to promote the implementation of monetary policy to stabilise the economy. Therefore, the SHFE/LME price ratio kept improving.
On the fundamentals, the Las Bambas copper mine has resumed the production. Domestic output of 819,000 mt in May was at the low level of the year, and the output in June will recover greatly with the end of the centralised maintenance of smelters. On the demand side, the low operating rates of copper processing companies led to poor demand. Copper scrap supply increased as the logistics and transportation, recycling and dismantling of copper scrap in China gradually resumed, so the spread between the copper cathode and copper scrap expanded, and the weekly operating rate of secondary copper processors also rose last week. The resumption of production in China continued to advance, but the new orders for wire and cable in infrastructure and real estate rose slowly. At the end of last week, the orders for copper rods increased sharply and the in-plant inventory of finished products declined as the falling copper prices pushed up the downstream restocking demand. The weekly operating rate of copper cathode rod producers increased last week. The overall fundamentals in the market were still weak.
Copper prices rebounded to 68,500-70,000 yuan/mt after falling below the previous platform level. The market shall keep an eye on the sustainability of domestic consumption, and judge whether copper prices will drop under the pressure of the macro front.
The most-traded SHFE 2208 copper contract is expected to trade between 68,500-70,000 yuan/mt, and LME copper will trade between $9,000-9,250/mt.
In the spot market, the downstream held a wait-and-see attitude cautiously toward the bearish market outlook. Besides, the inflow of overseas sources and the increase in output of domestic smelters that ended the overhaul suppressed the prices, and the premiums may not rise in the future. Premiums are expected to move between 150-280 yuan/mt this week.
According to the customs data, China's imports of copper cathode (unwrought copper, copper cathodes with Cu> 99.9935% and other unwrought copper cathodes) in May 2022 stood at 290,300 mt, up 7.41 percentage points MoM, and up 4.90 percentage points YoY. The imports from January to May decreased by 2.45 percentage points YoY. China's exports of copper cathode in May were 29,400 mt, down 51.84 percentage points MoM but up 16.35 percentage points YoY. The exports from January to May increased by 48.04 percentage points YoY.
The month-on-month increase in imports from Congo (DRC) and Russia in May completely covered the decrease in copper cathode imports from traditional suppliers such as Chile and Peru. In May, China imported 73,200 mt of copper cathode from Congo (DRC), an increase of 21.61 percentage points, or 13,000 mt, MoM, which was caused by the improved logistics conditions. Russia increased the shipment of the copper cathode to China after the geopolitical crisis. The imports from Russia increased by 10.74 percentage points to 137,000 mt. The flowing of cancelled warrants of LME Asian warehouses to China was also reflected in the import volume of May.
In May 2022, China's exports of copper cathode dropped sharply as domestic smelters and traders completed the export plan in April. In May, the export volume under processing trade with imported materials dropped by 10,700 mt MoM to 15,200 mt, returning to the neutral level of domestic smelters. The volume of the goods in special customs supervision areas fell by 19,500 mt.
SMM expects that China's imports will increase slightly in June, while the exports may continue to decline. Sources from neighbouring countries, especially LME Asian warehouses, will be the main force, which will offset the decrease in goods from some other countries (for example, copper cathode imported from Chile in May decreased by 38.14 percentage points). The export volume will mainly be the delivery of long-term orders of domestic smelters, and the quantity may shrink to around 15,000 mt.