The global recession is expected to dampen demand
July 27 news: Macro and supply and demand both sides of the copper price weakness is more likely. The author through the resumption of this round of copper price rising trend found that the three factors that previously pushed up the price of copper have weakened or turned signs, so do not exclude the possibility of copper price falling to 47000-50,000 yuan/ton.
Macro aspect
Expectations of a global recession have increased and the copper inventory cycle may have peaked. Copper has higher financial properties than most commodities. Historically, the global economic cycle lasts for about 10 years. However, due to the impact of the pandemic, the European energy crisis aggravated by the Russia-Ukraine conflict after 2022, and the rapid interest rate hike of the Federal Reserve under the pressure of fighting inflation, global economic growth faces downward risks ahead of time. The decline in U.S. PMI data accelerated, Europe showed even more weakness, high inflation limited its crisis-fighting tools, and copper prices are highly in line with global growth as worries about the European debt crisis continue to push up. Although the domestic economy is likely to enter a weak recovery stage, the overseas demand for copper accounts for about 40%. In the recession phase overseas, copper downstream will still be significantly depressed, copper prices will drag down.
From the perspective of the short cycle, the end demand of copper enterprises will actively or passively adjust their inventory due to the economic situation, so the inventory cycle has a certain impact on the copper price. The copper inventory cycle in China and the United States basically kept pace, but due to the influence of the epidemic and other factors, the start of the new round of copper inventory cycle in China was significantly ahead of the overseas market. At present, the domestic copper inventory cycle has shown signs of peaking, and leading indicators of industrial PPI inflection point. However, while the US copper inventory cycle is on an upward trend, both the leading indicator inventory-sales ratio and import data show signs of falling or peaking. Looking at traditional goods surplus economies, repeated deficits in Germany, South Korea and emerging market Vietnam are also evidence of weakening global demand.
The margin of US inflation expectations is down and the need for hedging is weakening. Since the beginning of this year, the Federal Reserve has raised interest rates several times, and the time lag of interest rate hikes confirms that this round of interest rate hikes is more about the need to curb inflation, so the impact on copper prices is negative. The Fed is likely to raise rates by 75 basis points in July. Inflation expectations in the US have fallen sharply from their high levels in anticipation of a rapid rate rise by the Federal Reserve. According to the historical trend analysis, copper price in addition to maintaining a high correlation with economic growth, there is also a high synchronization with inflation expectations. With the Fed's aggressive rate hike expectations, US inflation expectations are easier to get down than up. Historically, the more aggressive the pace of rate increases, the faster the recession.
The supply side
First, look at copper mines: the impact of the epidemic subsided, and the marginal growth rate of copper mines in the second half of the year was upward. Typically, COPPER PRODUCTION IS HEAVILY INFLUENCED BY CAPITAL EXPENDITURES, which KEEP pace WITH copper prices or lag by a year, BUT IT usually takes four to five years to RAMP UP PRODUCTION BECAUSE OF the LONG construction cycle. The last copper bottom was in 2016, but the timing was delayed by the pandemic. At present, the global epidemic control has been relaxed, the release of copper production is expected to gradually reflect. Global copper production is relatively concentrated, with major miners reporting some declines in the first quarter due to the pandemic, strikes, maintenance, environmental protection, climate and lower mine grades, but most of these factors were short-lived. Although some miners cut their full-year copper output forecasts in their quarterly reports, the average output growth forecast remained at a more optimistic 6 percent. In 2021, global copper output grew by 1.65%, while output growth of major miners reached 2.89%. Therefore, in 2022, the copper output growth rate may be 3.6-4%.
Look at the smelting end: the processing fee and the price of by-products are synchronized upward, and high profits help the production capacity. Processing fees have been rising since the second half of 2021 due to increasing market expectations of copper production release. At present, TC/RC fees have been running at historically high levels. In late June, China's Joint Copper Feedstock Negotiating Group (CSPT) held an online meeting to set a guidance price of $80 per dry tonne for spot copper concentrate in the third quarter of this year, compared with $55 per dry tonne in the same period last year, confirming expectations of a shift to looser copper supply. At present, the conversion smelting processing fee is about 2,500 yuan/ton, while the copper smelting cost in China is between 1,800 and 2,500 yuan/ton, indicating that the copper smelting industry is improving its profitability. In addition, sulfuric acid as a by-product is also adding to the profits of copper smelters. With the price of sulfuric acid maintaining 900 yuan/ton recently, the profit of smelting enterprises reached 3,000 yuan/ton, which is at a historical high. In the first half of 2021, China's refined copper output grew by 3.68% year-on-year from January to May, driven by high profits, despite the impact of power rationing and other factors.
Demand side
Traditional Demand: The power sector is providing major growth for the market, with a weak recovery in real estate weighing on appliance demand. At present, the second half of the infrastructure investment to continue to force there is a greater certainty. According to statistics, from January to June, the amount of completed infrastructure investment increased by 9.25% year on year. From the perspective of funding sources, the two incremental policy tools proposed by the regular meeting of the State are expected to make up for the gap between revenue and expenditure caused by the special debt in the first half of the year and the normal nucleic acid testing, and the infrastructure will still maintain a high growth rate throughout the year. In addition, 126.3 billion yuan has been invested in power grids, which are highly correlated with copper downstream demand. Despite maintaining a year-on-year growth rate of 3.1%, due to the impact of the pandemic, there is still a large distance from this year's target. Earlier, according to the State Grid and China Southern Power Grid investment plan, this year's investment target will reach 625 billion yuan. That means the average monthly investment in the second half of the year will exceed 70 billion yuan, a significant increase compared with the same period last year. And the power supply investment increment will mainly focus on the wind power, photovoltaic and other aspects related to new energy. The author according to the historical data and combined with the new energy plate incremental forecast, this year the power plate demand is expected to increase 1 million - 1.3 million tons.
In terms of automobile, although the stimulus policies are frequent, the actual driving effect of automobile consumption stimulus policies on production and sales is weakened year by year from the perspective of the promoting effect of past policies. In addition, in June, the year-on-year growth rate of automobile production rebounded to 26.8%, but the growth rate mainly comes from new energy vehicles, and currently supporting the purchase and use of new energy vehicles is an effective way to stabilize and expand automobile consumption and ensure the smooth operation of the industry. Therefore, the stimulus policy is still focused on new energy vehicles, the main increase in copper used in cars this year will still come from new energy.
In terms of real estate, in the first half of this year, the area sold, the area newly started, the area under construction and the area completed all declined significantly. From the perspective of residents' demand, the leverage ratio of Chinese residents has been close to the level of European and American countries, and under the condition that the policy of "housing, housing and no speculation" has not changed, the sales end may be significantly improved in the second half of the year. A weak housing recovery will also weigh on the appliance sector, with construction and appliances likely to use less copper this year than last.
New energy demand: the demand increment is relatively significant, but the total proportion is limited. In the medium and long term, the demand for copper in the new energy sector will continue, but the marginal positive support for prices is waning. The main reason is that the market has been increasing the growth rate of the new energy industry, and the copper price has fully responded to it, with limited incremental drive to the price. Take the wind power industry with the largest amount of copper as an example, the new wind power installed this year is expected to reach 60GW, the new installed capacity from January to May has reached 10.82 million kW, and the remaining uncompleted volume is 49.18 million kW. That compares with 39.78 GW installed from June to December last year, meaning that the growth rate of new wind power installed in the second half of the year was only 23.63%, well below the 60.5% year-on-year growth in February and slightly lower than the full-year growth rate. Therefore, although the new energy plate will still maintain high demand for copper, but its marginal profit on price growth gradually weakened.
In addition, although the incremental demand of the new energy sector is relatively significant, its proportion in the downstream demand for copper is relatively limited. It is estimated that the demand for copper in the new energy sector is expected to reach 1.41 million tons this year. Among them, 350,000 tons of photovoltaics, 470,000 tons of automobiles, and 590,000 tons of wind power. New energy accounts for only 10 per cent of annual copper demand of about 14m. With demand growth slowing, the impact on copper prices has gradually waned.
Policy Suggestions
According to the consumption situation of traditional fields and new energy fields, due to the increasing demand for copper in the power sector and new energy-related industries, domestic copper consumption will continue to grow this year. However, the increase will be relatively limited, weighed down by the real estate and appliance sectors, making it difficult to hedge against a downturn in overseas demand.
From the perspective of supply, copper mine output is expected to be further released in the second half of the year, and the operating rate of domestic smelters will remain high against the backdrop of high profits. Overall supply margin to loose, domestic copper supply and demand structure will shift from tight balance to a small surplus. Figures released by the International Copper Study Group (ICSG) suggest the global copper surplus will widen further in the second half.
From the macro point of view, at present, the Federal Reserve rate hike there is a further acceleration of the possibility. In the context of rapidly tightening global liquidity, downward inflation expectations in the United States have been accompanied by increasing expectations of a global recession, which has weighed on non-ferrous metal prices.
In absolute terms, although copper prices have fallen about 26% since their peak this time around, they are still above their average, and compared with history, three rounds of sharp declines in copper prices since 2007 have fallen 66%, 54% and 35%, respectively. In comparison, the previous three rounds of declines lasted 1.5, 4.5 and 2.5 years, respectively. Therefore, no matter from the time or from the perspective of space analysis, copper prices have further room to fall.
Through the review, the author believes that this round of copper price rise has gone through three stages. The main drivers are the supply tightness caused by the pandemic, the global easing policy to promote demand, and the high inflation caused by liquidity to support commodity prices. However, the above three factors are now showing signs of weakening or turning, superimposed macro driven downward, do not exclude the possibility of copper price falling to the early 2020 level (47000-50000 yuan/ton).
