1．Copper Market to be Pressured in H2 amid Contracting Liquidity and Weak Fundamentals

SMM predicts that the global copper mine production will grow 5% year-on-year in 2022. It is expected that China's copper cathode output will rise 4% year-on-year in 2022. The surge in copper cathode supply in the second half of the year is a foregone conclusion, and the improvement in demand is of concern. Shrinking liquidity, coupled with fundamental pressures, will weigh on copper prices in the second half of 2022.

I. Macro front:

The US Fed aggressively raises interest rates amid high inflation, and recession fears keep investors on edge

U.S. CPI hit another 40-year high in May. The possibility of a non-linear and more aggressive measures by the US Federal Reserve has increased, and the confidence of the American people in the economy has gradually declined. The continued decline of the copper/oil ratio also gives us a warning that the economy has turned from "stagflation" to recession.

The European Central Bank is considering raising interest rates amid the dilemma of controlling inflation and facilitating economic growth

The European economy is neither stable nor balanced, but the inflation problem has to be addressed. The European Central Bank announced in June that it would raise its key interest rate by 25 basis points at its July meeting. And net asset purchases under the APP (Asset Purchase Program) will end on July 1, 2022.

The European Central Bank initiated the rate hike course, and the US dollar is briefly contained. However, in the process of joint tightening by European and American central banks, the euro will remain weak against the dollar in general.

Domestic policies are firm to stabilise economic growth, fuelling the economic to bottom out

Financial readings rebounded beyond expectations in May, reflecting a positive attitude towards steady domestic growth. But structurally, domestic demand is still weak. A loose liquidity environment is formed, but the effect of the policy needs to be further verified by the real economy.

Inflation remains high in the world's major economies, which has heightened recession expectations.

II. Fundamentals

SMM predicts that the global copper mine production will grow 5% year-on-year in 2022. The total production capacity of blister copper smelting projects in China and abroad in the past five years has reached 5.46 million mt, of which 2.23 million mt are likely to be planned.

Thanks to high TC of concentrate and high prices of by-product sulphuric acid, domestic smelters gain lucrative profits

Thanks to cheering TC and by-product sulphuric acid prices, domestic copper smelters have gained sound profits, driving the production enthusiasm. However, the operating rates of domestic smelters are already at a high level, and the marginal promotion through lucrative profits to China's copper cathode production is limited.

Intensive maintenance of smelters and sudden shutdown of production during the year have weighed on the annual production guidance

As a number of domestic smelters have been overhauled intensively, the copper cathode production bottomed in May (the second lowest in the year), coupled with the shutdown of smelters in Shandong. In addition, the progress of the new projects is less than expected, and the annual copper cathode production guidance is expected to be lowered. It is expected China’s copper cathode output in 2022 will record 10.38 million mt, a year-on-year increase of 4%.

In the first half of the year, the import window rarely opened, and the import volume of copper cathode remained low

In the first half of the year, the import window rarely opened, and domestic copper cathode imports remained low. The opening of the export window once encouraged domestic smelters to actively export copper cathode to the bonded areas or overseas warehouses, further exacerbating the supply tightness in China.

However, in the second half of the year, the output of domestic copper cathode is expected to rise significantly, suppressing the demand for imported copper. However, the different development orientation of China and foreign economies will bring opportunities through the SHFE/LME price ratio.

The tight supply of copper scrap also provides support for the de-stocking of copper inventories

Due to the domestic pandemic situation, the recovery of domestic copper scrap is not satisfactory.  Domestic traders have had insufficient inventory on hand following the copper price boom last year, hence the supply flexibility of scrap has weakened.

The difference in the weekly operating rates of copper rods produced with copper cathode and secondary copper also partly reflects the supply tightness of scrap. The sharp drop in copper prices has narrowed the spread of copper cathode and scrap, which once dropped to the negative zone. As such, scrap users have reduced or suspended the production for lack of raw materials.

The expected domestic copper cathode growth partially materialises, but the social inventory is still at its historical low

The total domestic social inventory has been falling since March, and has since been at a historically low level for the same period in the year, which has provided obvious support for the backwardation structure of SHFE front-month and next-month contracts and the spot premiums. At present, some of the expected domestic supply growth has materialises (mainly from the resumption of production of smelters in Shandong), coupled with the marginal recovery of the consumption, the social inventory has been pinned to the bottom.

Affected by the pandemic, copper consumption is weaker than the same period in previous years

Due to the impact of the pandemic, the poor downstream household appliances and construction sectors have resulted in lower operating rates of copper cathode rods, copper plate/sheet, copper tube, and wire and cable.

In the first half of 2022, infrastructure construction fails to stimulate the economy, and the investment growth of power grid projects diverges

In 2022, State Grid plans to increase its investment by 1.2%; but considering the rise in raw material prices, the growth is not enough to significantly shore up the copper consumption. During the "14th Five-Year Plan" period, the national power grid investment is expected to be nearly 3 trillion yuan. Although it is significantly higher than the 2.57 trillion yuan and 2 trillion yuan during the "13th Five-Year Plan" and "12th Five-Year Plan" period, it is worth paying attention to the investment orientation, as well as the rising unit consumption caused by rising material prices.

Real estate generates increasingly less demand for copper, dragging on household appliances and other related industries

The related readings of real estate are sluggish. Although the government continues to introduce supporting policies, the real estate is still at the bottom after the pandemic situation improves, with few new orders. Due to the drag of real estate and the closing export window, the domestic demand and export orders have weakened simultaneously, and the output of home appliances experienced a negative year-on-year growth.

Traditional automotive and electronics industries are sluggish, while new energy-related industries maintain resilience

With the improvement of the shortage of imported parts and components affected by the pandemic, domestic suppliers of car parts and components in the Yangtze River Delta region have gradually resumed basic supply, promoting the rapid recovery of production nationwide in May.

The production and sales of new energy vehicles have continued to revive, and the penetration rate grows continuously. The automobile industry chain and OEMs in Shanghai have resumed work and production, and the prices of raw materials for power battery that affected power battery companies and OEMs have begun to fall. The supply-demand balanced will be more greatly reversed in the second half of the year, and the new energy vehicle industry has ushered in a turning point.

As the pandemic situation improves, the shortage of chips in the electronics industry will ease. But the demand for end-consumer electronics is weak, and new energy-related industries alone are unable to fully drive copper consumption.

Overseas inventories have returned to the downward channel, and the spot supply is still tight under the pressure of European and American supply chains

After the tide of domestic copper exports passes, LME inventories enter a downward channel again, among which European inventories are particularly low. Under the influence of the second-quarter maintenance of smelters in Europe, the supply tightness of spots is quite obvious. Constrained by limited transport capacity and rising freight costs, spot premiums in Europe and the United States continue to rise.

The surge in copper cathode supply in the second half of the year is a foregone conclusion and the improvement in demand is of concern

Shrinking liquidity, coupled with fundamental face pressures, will weigh on copper prices in the second half of 2022.

 

2.Base Metals Mostly Closed with Losses amid Worries over Sluggish Consumption

SHFE and LME base metals closed with losses as the current market liquidity tightening is not expected to change and domestic and overseas consumption is both sluggish, triggering market concerns for an economic recession, putting base metals under pressure.

LME copper fell 1.17%, aluminium lost 1.73%, lead added 0.83%, and zinc slid 1.27%.

SHFE copper fell 0.76%, aluminium lost 1.44%, lead shed 0.2%, and zinc slid 0.15%.

Copper: LME copper opened at $7,328/mt yesterday, and then fell to $7,220/mt. At last, the contract closed at $7,298/mt, down $86.5/mt, or 1.17%. Trading volume was 15,000 lots, and open interest stood at 239,000 lots.

SHFE 2208 copper contract opened at 56,100 yuan/mt in overnight trading and fell straight to 55,360 yuan/mt before rallying to 56,100 yuan/mt. The contract closed at 56,060 yuan/mt, down 430 yuan/mt, or 0.76%. Trading volume stood at 54,200 lots, and open interest stood at 120,000 lots.

On the macro front, news reports suggested that European Central Bank (ECB) policymakers were considering a larger than expected 50 basis point rate hike at Thursday's meeting in an effort to curb record high inflation. The euro rallied, taking it further away from the near flat level it touched last week; while market expectations of a 100 basis point rate hike by the Federal Reserve this month fell, dealing a blow to the dollar, with the dollar index falling for a third consecutive day. The current market liquidity tightening is not expected to change and domestic and overseas consumption is both sluggish, triggering market concerns for an economic recession, putting copper under pressure.

In the spot market, as futures prices rallied after the delivery of SHFE2207, and SHFE/LME price ratio hovered around 7.72. The import window is still closed despite improvement in the price ratio. Some hedgers were unable to close their positions, and hence were not interest in making shipments. Currently, the premiums did not appeal the buyers, while the downstream awaited further price drops, leaving the market in a stalemate.

Aluminium: The most-traded SHFE 2208 aluminium contract went down after opening at 18,030 yuan/mt, and closed at 17,770 yuan/mt, down 260 yuan/mt or 1.44%.

LME aluminium opened at $2,430.5/mt on Tuesday and closed at $2,385/mt, down $42/mt or 1.73%.

The domestic aluminium supply maintained a slight increase. The social inventory of aluminium ingots continued to decrease as some downstream producers continued to restock. Trades in the spot market in east China were somehow active. Improved macro front led to a rebound in commodities, but the rally was mild. It is expected that the short-term aluminium prices will remain volatile.

Lead: LME lead opened at $1,983/mt and fell during the Asian trading hours. During the European trading hours, LME lead further declined to $1,943.5/mt, but rebounded near the end and closed at $1,994/mt, up 0.83%. 

The most-traded SHFE 2208 lead contract opened at 15,050 yuan/mt and fell by 0.20% to 15,115 yuan/mt, after briefly hitting the lowest point at 14,940 yuan/mt and the highest point at 15,125 yuan/mt.

Zinc: LME zinc closed at $2,957/mt on Tuesday, down $38/mt or 1.27%. The open interest fell 6,031 lots to 206,000 lots. Overnight LME inventory fell 1,425 mt to 73,250 mt, down 1.91%. The support from supply tightness and low LME inventory have been offset by macro risks, hence LME zinc will still be pressured.

The most traded SHFE 2208 zinc contract closed at 22,580 yuan/mt overnight, down 35 yuan/mt or 0.15%. The open interest fell 2,702 lots to 91,628 lots. Currently, the zinc market was weak in both supply and demand, and zinc prices were still on the downward track.

Overnight, Russia and Iran signed a $40 billion agreement, and Iran agreed rial-ruble trading; market expects Nord Stream 1 delivery to resume as expected, and Russia assumes oil price floor to be $60/barrel. Australian Fed minutes: to further tighten the monetary policy, and the interest rate is too low to curb inflation. Eurozone June CPI annual rate is finalised at 8.6%, ECB to discuss 50 bps rate hike this week. BOE governor: to step up anti-inflation, and is considering 50 bps rate hike in August. Liu He co-chairs the 9th China-EU High Level Dialogue on Economy and Trade with European Commission Executive Vice President Dombrovskis. Ministry of Finance, Henan Supervisory Bureau: to resolutely guard the bottom line of no regional systemic risk. Ministry of Industry and Information Technology: multiple measures will be deployed to boost industrial economy.

Tin: Overnight, the most-traded SHFE tin contract traded rangebound. Longs and shorts continued to exit the market. Domestic tin inventory under warrants remained unchanged yesterday. The performance of the spot market was relatively stable. LME tin inventory decreased slightly. The import profit window was closed. The number of quotations for imported tin in the spot market was limited, and the price advantage was not obvious. Some tin smelters are expected to complete maintenance this week. Given the balanced supply and demand, SHFE tin is expected to hover around the current level.

Nickel: On the supply side, Jinchuan nickel was still quoted with high premiums amid improving terminal demand, but the overall supply was short despite some arrivals this week. For NPI, the transactions were still muted though futures and spot prices of stainless steel rebounded slightly. On the demand side, nickel sulphate produced with nickel briquette started to profit after SHFE nickel slumped earlier, but it has not been pinned as SHFE nickel has been volatile recently. Hence there were few transactions for briquette at present. For stainless steel, the prices in Wuxi were stable, and tested highs in Foshan. Inquires picked up, but the actual transactions were thin. There was still demand for nickel plate in the military-oriented alloy sector.  

 

 

 

 

3.Expectations of Declining Transactions Dominated the Market, and Copper Prices Remained Rangebound with Downward Risks

Last week, the shorts still dominated the market. The growth of the overall US CPI and the core CPI in June released at the end of the week both exceeded market expectations, with the CPI increasing by 9.1% YoY, which was expected to be 8.8%, and the core CPI rising by 5.9% YoY, which was expected to be 5.7%. The world is experiencing enormous pressure of inflation brought by the Russia-Ukraine war and the mismatch of global supply and demand. After the global central banks successively raised the interest rates, the market players continued to trade economic recession expectation. On Friday night, the hawkish Fed officials expressed their support for raising the interest rates by 75 basis points in July, which still failed to save the market from collapsing. In China, a series of economic data was released on July 15, and the GDP in the second quarter increased positively year-on-year. The follow-up stimulus policies can still be expected. On the fundamentals, smelters maintained stable production. When the import window opened in the past several weeks, copper cathode stored in the bonded warehouses was moved to the domestic market one after another and approaching the delivery of the 2207 contract, some imported goods were registered as warrants, resulting in a slight increase in the domestic inventory. At the same time, due to the continuous sharp drop in copper prices, the supply of copper scrap plummeted, so the spread between the copper cathode and copper scrap narrowed, which is beneficial to copper cathode consumption to a certain extent.

As for domestic consumption, the real estate industry still did not improve. Frequent reports of shutdown in some areas indicated that the real estate sector cannot pick up in the short term. The overseas monetary tightening policy continued to advance, and the central banks raised the interest rates one after another. The market risk appetite went down further, thus the expectations of declining transactions dominated the market, and copper prices remained on the downward track. The most-traded SHFE 2208 copper contract is expected to move between 53,000-55,000 yuan/mt, and LME copper will trade between $6,850-7,200/mt.

Although the SHFE/LME price ratio did not favour the import market, some traders still insisted on importing, and the spot premiums could hardly be kept at 200 yuan/mt. After the delivery of the SHFE 2207 copper contract this week, the premiums cannot reach beyond 200 yuan/mt amid continuous falling copper prices and poor consumption. Spot premiums are expected to move between 120-200 yuan/mt this week.

 

 

 

 

 

 

4.Copper Prices Further Declined and the Throughout of East China Nonferrous Metal City was Low

From July 11-17, the secondary copper throughout of East China Nonferrous Metal City in Linyi stood at 11,300 mt, up 5.34% from the previous week. According to SMM (July 11-15), the weekly average price of 1# copper cathode was 56,965 yuan/mt, down 2,923 yuan/mt or 4.88% from the previous week. The weekly average price of bare bright copper in East China Nonferrous Metal City in Linyi was 52,170 yuan/mt, down 1,280 yuan/mt or 2.39% from the previous week.

Last week (7.11-7.15), copper prices continued to fall, but the decline was narrower. Some traders chose to clear their inventory, some small traders chose to temporarily suspend the business. Most other traders were not motivated to pick up goods. The overall market supply was still very tight. In addition, according to SMM research, scrap users were less willing to purchase and mainly purchased as needed as the orders were poor amid the weak demand and traditional off-season. The market demand for secondary copper continues to decline and it is expected that the throughput of secondary copper in East China Nonferrous Metal City will remain low this week (July 18-24).

 

5. Prices of INE Bonded Copper Renounced amid a Bullish Market

The most-trade INE bonded 2209 copper contract today was on the rise as a whole. It kept falling most of the day, but later rebounced and closed at 49,560 yuan/mt after hitting the lowest point of 49,310 yuan/mt, up 580 yuan/mt, or 1.18%. The trading volume was 20,171 lots, and the open interest decreased by 390 lots to 16,497 lots with the exit of longs. On the macro side, Fed officials hinted that they did not advocate raising interest rates by 100 basis points. As the market lowered the expectation of the Fed to raise interest rates aggressively, and the sentiment was somewhat restored, the prices of the INE bonded copper rose. The SHFX 2209 copper contract closed at 55,800 yuan/mt, and the INE bonded 2209 copper contract at 56,003 yuan/mt (tax included). The price difference was 203 yuan/mt.