1．Supply of Copper Scrap Continued to Recover as the Copper Prices Trended Higher

Copper scrap supply continued to improve as the scrap traders sold more goods amid the rebound in copper prices since mid-July. According to SMM data, the throughput of copper scrap in the East China Nonferrous Metals Market was about 22,000 mt from August 22 to August 28, up 29.15% WoW. According to some scrap users, the procurement of bare bright copper and other products improved, thus they could maintain the normal production of some production lines. In addition, the pandemic situation in Guixi city, Jiangxi province eased, and transportation conditions became normal. The local scrap users were able to purchase copper scrap smoothly.

According to customs statistics, the import volume of copper scrap in July was 155,200 mt, down 6.04% from the previous month. The imports totalled 1.04 million mt from January to July, a year-on-year increase of 6.77%. The decline in imports in July was in line with the expectations, which was caused by the sharp drop in copper prices in late June, the losses of overseas suppliers, the tight supply of high-quality red copper scrap, and the poor demand for imported brass scrap from domestic copper billet companies. It is expected that overseas sources will continue to flow into China as the domestic copper prices rebounded in July, which will supplement the supply gap to a certain extent.

In general, the demand from wire and cable and other sectors was stable and improving, and the consumption in the third quarter was expected to improve. However, the total supply of red copper scrap was still limited, while the potential demand is strong. It is expected that the supply of red copper scrap is unlikely to become sufficient.

 

 

2. Copper Prices to Stay High amid Tight Supply, even as Hawkish Stance of the US Fed is in Favour of the US Dollar

From a macro perspective, since Fed Chairman Powell delivered a hawkish speech at the Jackson Hole central bank annual meeting, other US Fed officials have also expressed their firmness to fight extremely high inflation. The recently released US August CPI and core CPI data unexpectedly beat market expectations, igniting fears that the US Fed will maintain a hawkish stance over interest rate hikes for a longer period of time. At present, the US Fed’s swap transactions have fully priced in a 75 basis point hike in interest rate in September. Whether the Fed will raise the upper limit of the federal funds rate for a second time at its September meeting is also a particular concern of the market. The US dollar will remain firm. Other central banks' interest rate hikes, such as the European Central Bank's hike in three key interest rates by 75 basis points in September, will bring short-term pressure to the US dollar, thus adding to the volatility of copper prices. The macro environment in China is relatively optimistic. The financial data improved in August, especially the medium and long-term credit, which showed obvious recovery. The domestic demand has begun to recover, but the willingness of enterprises and residents to save continued to rise. Zhengzhou City, Henan Province, held a meeting with property developers to ensure the full resumption of suspended housing projects, boosting market confidence.

In terms of fundamentals, LME copper inventories kept falling, and are currently around 100,000 mt. The LME copper cash-to-three-month backwardation hit a new high since the end of November last year, reflecting tight supply in the spot market. Potential supply disruptions have also worried the market after news that workers at Chile's Escondida copper mine, the world's largest copper mine, threatened to strike due to safety concerns. In China, copper smelters in some regions have returned to normal operating levels after the power rationing was lifted, but those in Jiangxi and Inner Mongolia are still disturbed by the pandemic. It remains to be seen how rapidly the demand will recover in the traditional peak season. Copper scrap supply will remain tight, while copper inventory is at a low level. As of September 13, SHFE copper inventory under warrants stood at merely 3,224 mt, while the open interest of the front-month contract was at a staggering high of 14,550 lots. 

While the macro risks have abated when compared with August, hawkish stance of the US Fed will put pressure on copper prices in the medium and long term. The Fed's September FOMC meeting will deserve close attention. Tight supply should sustain copper prices at highs in the short term. It is expected SHFE copper and LME copper will run between 60,000-64,500 yuan/mt and $7,500-8,100/mt in September.

 

 

 

 

3.Copper Inventory in Major Chinese Markets Dipped 5,300 mt on the Week

As of Friday September 16, SMM copper inventory across major Chinese markets stood at 84,500 mt, down 5,300 mt from Tuesday but up 13,800 mt from last Friday. Compared with Tuesday’s data, copper inventory in most regions across China decreased except that in Guangdong. The total inventory dipped 27,500 mt compared with the same period last year when the data was 112,000 mt, Among them, the inventory in Jiangsu dropped 13,200 mt, that in Shanghai fell 10,300 mt, and that in Guangdong dipped 5,500 mt. The main reasons for the decrease in inventories this week are the delay in the arrival of imported copper in Shanghai due to the typhoon and the upstream shipped goods directly to the downstream companies amid the high premiums.

In detail, the inventory in Shanghai dipped 4,800 mt to 66,500 mt compared with Tuesday. The inventory increased first and then decreased. At the beginning of this week, the imported copper was cleared in a centralised way, but later, the amount of imported copper was greatly reduced because of the typhoon. In Guangdong, the inventory added 2,000 mt to 10,300 mt. Affected by factors such as the high premiums and the wide spread between the front-month and next-month contracts, the downstream production was not active, and the operating rates of many downstream companies stood at about 50%, which can also be reflected in the continuous decline in the average daily shipment flowing out of the warehouses in Guangdong.

Looking ahead, import volume in Shanghai is expected to increase next week after the typhoon, and domestic copper arrivals may also rise due to growing production. The consumption may bottom out. Therefore, the inventory next week will rise slightly amid the booming supply and demand.

 

4.Multiple Adverse Factors Restricted Recovery in Operating Rates of Copper Cathode Rod Enterprises in August

According to SMM data, the average operating rate of copper cathode rod producers rose 0.07 percentage point on the month and dropped 0.56 percentage point on the year to 74.44% in August. The average operating rate across large, medium-sized and small enterprises was 78.28%, 68.28% and 64.82% respectively. (Notes: SMM surveyed 53 producers with a total production capacity of 12.87 million mt.)  

The average operating rate of copper cathode rod producers only gained 0.07 percentage point MoM in August, which was lower than expected. On the one hand, the pandemic in Jiangxi weighed on the production and sales of copper cathode rod enterprises, dragging down the average operating rate. On the other hand, the spot premium of copper cathode in south China remained high in the second half of August, and many local copper cathode rod enterprises reduced or suspended the production, hence the sluggish production resulted in a decline in output. In addition, power rationing across east China in August restricted the production in some copper cathode rod enterprises in Anhui and Zhejiang, where the output declined and the operating rates also fell.

Although the average operating rate in August fell short of expectation, it still stood at the similar level of the same period in previous years. SMM survey indicated that driven by the rising demand from the wire and cable sector, copper cathode rod enterprises have seen a significant increase in orders since late June. With sufficient orders, enterprises virtually maintained full production in August, and the operating rates of most enterprises steadily moved up. Furthermore, the secondary copper rod producers were still constrained by the tight supply and high prices of raw materials. Given that secondary copper rods were less favoured with low economic benefits, the consumption of copper cathode rods was further boosted.

Overall, multiple negative factors in August including pandemic, power rationing and high premiums dragged down the operating rates of the copper cathode rod producers. But thanks to the improvement in wire and cable demand and the continued poor substitution effect of secondary copper rods, the average operating rate of copper cathode rod producers still recorded a slight increase.

Raw material inventory/output ratio stood at 6.61% in August  

Raw material inventory/output ratio of copper cathode rod enterprises was 6.61% in August, down 0.54 percentage point from the previous month. Although the raw material inventory of some copper cathode rod enterprises stayed low due to the pandemic and high premiums, most enterprises had sufficient orders and maintained full production. Raw materials were mainly purchased as needed, and the raw material inventory/output ratio was at a normal level.

Average operating rate of copper cathode rod enterprises is estimated at 77.16% in September

The average operating rate of copper cathode rod producers in September is expected to rise by 2.72 percentage points month-on-month and 5.33 percentage points year-on-year to 77.16%. Judging from SMM survey, the pandemic in Jiangxi is gradually eased, thus its negative influence on copper cathode rod enterprises will gradually subside. At the same time, other adverse factors such as power rationing and high premiums will also fade. Therefore, the operating rates of copper cathode rod enterprises are expected to show an upward trend amid the high expectations for consumption during the September-October peak season. Still, it is necessary to stay alert to the disruption caused by the domestic pandemic. At the same time, the copper prices rose in early September, which constrained the downstream consumption lightly. The copper cathode rod enterprises did have received relatively sufficient orders, but if the price difference between copper cathode rods and secondary copper rods are expanded, or new orders declined constantly, then the growth in the operating rates of copper cathode rod enterprises is bound to be restricted.

 

 

 

 

5. Terminal Electronics Sector Improved Marginally, and Operating Rates of Copper Foil Enterprises Rebounded in August as Expected

According to SMM survey, the average operating rate of copper foil enterprises stood at 86.19% in August, up 5.65 percentage points on the month. The average operating rate across large, medium-sized and small enterprises was 87.20%, 87.51% and 77.91% respectively. In particular, the average operating rate of electronic circuit-oriented copper foil enterprises rose 8.5 percentage points month-on-month to 77.44%, while that of lithium battery copper foil producers increased 3.64 percentage points on the month to 94.48%. It is estimated that the average operating rate of all copper foil enterprises will stand at 87.80% in September, up 1.6 percentage points from the previous month.

The average operating rate of copper foil enterprises stood at 86.19% in August.

In terms of lithium battery copper foil: The average operating rate of producers saw a slowdown in growth as operating rates of some declined in August due to power rationing. On the demand side, although the power rationing in Sichuan and Chongqing affected the output of some battery factories in August, the overall output of the sector still saw a steady growth. Moreover, the MoM growth rate of LFP batteries exceeded that of NMC batteries, and the unit consumption of lithium battery copper foil also increased. SMM estimates that the output of NMC batteries in August will reach 20.6GWh, an increase of 5% from the previous month, and the output of LFP batteries will amount to 37.6GWh, up 12% month-on-month.

In terms of electronic circuit-oriented copper foil: The copper prices started retreating since late August, which stimulated copper plate enterprises to restock. As a result, the new orders for copper foil used in electronic circuits picked up slightly, and the inventory declined. When it comes to terminal demand, favourable measures were introduced in some domestic regions to stimulate the consumption of electronic products, and some brands of mobile phones and computers were bracing for production for new models as the start of new school semester was approaching. The demand for printed circuit board rose, but the sector was still sluggish as a whole. According to SMM data, the average processing fee of 18μm HTE copper foil in the traditional electronics field was 21,500 yuan/mt as of the end of August, down 1,500 yuan/mt from the end of July. This indicated that the electronics-related copper processing sector was still weak, and the consumption of the traditional electronics only improved marginally month-on-month.

Raw material inventory/output ratio and finished product inventory/output ratio stood at 14.73% and 19.4% respectively in August.

Copper foil enterprises mainly purchased as needed in August, so there was little change in raw material inventory/output ratio. While finished product inventory/output ratio slid 1.53 percentage points because the marginal improvement in terminal electronics prompted slight decreases in the finished product stocks of some enterprises.

Average operating rate of copper foil enterprises is expected to rise 1.6 percentage points month-on-month to 87.80% in September.

In September, the growth of operating rates at the copper foil producers has slowed down from a month ago. The main reason behind was the resurgence of sporadic covid-cases across the country, which forced some lithium battery copper foil enterprises to postpone the construction of newly added capacity. The enterprises who had originally been scheduled to be put into operation in September-October had to delay the commission to November. Meanwhile, the consumer confidence in the electronics sector was hit hard amid the pandemic. As eye-catching performance will hardly be seen in the traditional electronics sector, the operating rates of copper foil producers in September will be face downward pressure.