1.Expectations of Fed Rate Hikes Keep Market Cautious, Copper Prices to Face Resistance

LME copper prices closed at $8,970/mt overnight, a drop of 0.36%. Trading volumes were 14,000 lots and open interest stood at 253,000 lots. The most active SHFE 2305 copper contract finished at 69,580 yuan/mt overnight, down 0.03%. Trading volume was 17,000 lots, and open interest stood at 152,000 lots.

On the macro front, the U.S. dollar rose due to the rise in U.S. bond yields. But as the U.K inflation rate remained above 10% in March, the Bank of England continued to raise interest rates, making the pound rise against the U.S. dollar, limiting the dollar’s gains. In terms of fundamentals, the outflow of warrants in Shanghai was limited yesterday, which had little impact on spot premiums and discounts. In addition, the import loss narrowed to around 300 yuan/mt yesterday, and the market concerns about the continuous flows of imported copper into the spot market grew.

The market is worried about the pressure on spot premiums and discounts. In terms of consumption, lower SHFE copper prices failed to arouse the downstream buying interest, and only some low-priced goods were traded actively.

In terms of price, the domestic economy is expected to provide support for copper prices, and the high-end prices will be weighed by Fed rate hike. Copper prices are expected to remain rangebound.

 

 

 

2. Operating Rates of Copper Semis Producers Topped Expectations in March, but are Expected to Fall in April

China copper semis output is estimated at 1.95 million mt in March, up 11.17% month-on-month and 2.48% year-on-year, according to SMM research. Operating rates at copper semis producers averaged at 76.65% in March, up 12.02 percentage points month on month and 6.64 percentage points year on year.

The average operating rate of the copper industry in March rebounded as expected and significantly exceeded expectations. The copper tube enterprises contributed the major increase as their operating rates were significantly drove up by the increasing downstream demand amid sharp price cut of copper. The operating rates picked up across most copper semis sectors, and the average operating rates of each sector were as follows: copper tube (90.29%)> copper plate/sheet and strip (77%) >copper cathode rod (73.77%).

In particular, many copper tube companies have indicated that their production has been scheduled until May thanks to the sharp increase in orders from the home appliance industry. Orders for copper plate/sheet recovered seasonally by 2.83%, and orders for copper cathode rod increased benefiting from the narrow price spread between copper cathode and copper scrap. In addition, some cable factories and engineering projects purchased actively on dips in March, which made the average operating rate of copper cathode rod enterprises rise 12.54 percentage points.

Overall, the domestic demand outperformed the overseas one. On the one hand, the overseas demand continued to fall in March, and the downward pace slowed down. The manufacturing PMI of the United States, Europe, and Japan in March were 49.3, 47.1, and 48.6 respectively. On the other hand, domestic demand continued to pick up, though the expansion pace has slowed down. In March, China's manufacturing PMI was 51.9, staying in the expansion range but was 0.7 point lower than that in February.

Looking into April, SMM believes that the copper semis sector will extend the weakness, with the average operating rate at 91.65% for copper tube sector, 75.2% for copper plate/sheet and strip sector, and 72.86% for copper cathode rod sector. The average operating rate across the copper semis industry is expected to fall 0.77 percentage point MoM to 75.88%, up 15.49 percentage points YoY. According to SMM forecast, only the operating rates of copper tube sector can remain high, while those of other sectors are expected to fall. The reason for the prediction of a sharp year-on-year increase is that the base figure was low as many factories in east China were forced to suspend production due to the pandemic outbreak in April last year.

 

 

 

3. Imports in March Continued to Recover Seasonally but were not as Good as the Same Period Last Year

China copper semis imports are estimated at 41,300 mt in March, up 39.1% MoM but down 6% YoY. The imports totalled 99,700 mt in January-March, down 18.8% YoY.

The predicted exports in March are 59,500 mt, up 25.8% MoM but down 2.1% YoY. The imports totalled 164,800 mt in January-March, down 8.3% YoY.

SMM expects copper imports to rise sharply in March mainly owing to seasonal recovery, while the weak domestic demand is the main factor leading to the year-on-year decline in imports. The imports of copper rod and wires stabilised at 22,800 mt in January and February. The imports of copper sheet/plate and strip, foil, and tube stood at 12,700 mt, 20,000 mt, and 2,500 mt respectively in January and February, down 25.8%, 41.2% and 45.7% YoY, as is shown by the data from General Administration of Customs. The sharp year-on-year decline in imports showed that the domestic demand was really weak.

 

 

4. Risk of Global Economy Recession Suppressed Copper Prices

The US ISM manufacturing index unexpectedly fell to 46.3 in March, a new low since May 2020. In particular, the employment index hit a new low since July 2020, and the new orders index also fell into a deep contraction. At the same time, the US employment data also weakened, with the number of US job vacancies falling to 9.93 million in February, far below expectations. The JOLTS data in the last two months fell 1.3 million, the second largest drop in history. The US non-farm payrolls added 236,000 jobs in in March, which were lower than the expected 239,000. The final reading of the manufacturing PMI in the eurozone stood at 47.3 in March, confirming that the manufacturing industry in the region stayed in contraction. Specifically, new orders shrank for 11 consecutive months and export orders also fell further. Gold to copper ratio increased amid expectations of global economic recession. China's CPI in March rose 0.7% year-on-year and fell 0.3% month-on-month, which was lower than expected. In January to March, China's CPI rose 1.3% over the same period of the previous year. This implied that the resident consumption was still in the process of a recovery at a moderate pace. At the end of February, the year-on-year growth rate of resident savings deposits reached 18.3%, a record high in the past ten years, which suggests that consumption will be further released. Although the recovery of consumption was slower than expected, the domestic macro environment has eased and overseas countries have high expectations for China's economic growth. In terms of fundamentals, the shortage of copper cathode eased in light of sufficient copper scrap supply and less-than-expected output cuts caused by the maintenance. In terms of inventory, the slow decline in both domestic and overseas inventory provided only slight support for copper prices.

    On the whole, the gold to copper ratio has risen amid weak economic data. This, coupled with the risk of a global economic recession and uncertain financial stability, suppressed the copper prices. On the fundamentals, weak demand weighed on the copper prices, but the consumption showed a certain degree of resilience when copper prices moved down sharply. SMM sees the most-traded SHFE copper prices between 67,500-70,000 yuan/mt in April and LME copper prices between $8,700-8,950/mt.

 

5.Policymakers' Hawkish Speeches to Put Pressure on Copper Prices after Price Declines

LME copper prices closed at $8,884/mt overnight, a decline of 0.96%. Trading volume was 16,000 lots and open interest stood at 252,000 lots. The most active SHFE 2305 copper contract finished at 68,900 yuan/mt overnight, down 0.83%. Trading volume was 32,000 lots, and open interest stood at 134,000 lots.

On the macro front, the number of initial jobless claims in the US increased last week. The weak data strengthened market expectations for a US recession and further supported the view that the Federal Reserve may pause in June after raising interest rates again next month. The US index went lower.

In terms of fundamentals, spot quotes fell sharply yesterday, mainly due to aggressive shipments and weak consumption. The overall supply of cargoes in the market was relatively ample. The market expected that there would be warrants being offered for sale after the delivery of the April contract. This, coupled with the inflows of imported copper, weighed on spot quotes.

In terms of consumption, downstream processing companies only restocked as required, and this situation is unlikely to change in the short term under the high copper prices. The Fed's interest rate hike path is expected to guide copper prices, and some policymakers' hawkish speeches put pressure on copper prices.