Author: Cheng Xiaoyong
In late July, there was another surge in bulk commodities, and copper prices were no exception. The author does not believe that the resumption of the rally in late July was driven by demand expansion. Instead, the author believes that under the condition of weak global economic growth, the real interest rate decline in China and the United States brought about the rise in valuation and the return of investment demand.
However, the continued decline in China’s manufacturing PMI in July, the worsening of the new crown epidemic in the United States and the slowdown in the growth of durable goods orders further validated that the global economy is on the decline again. However, the high inflation in the United States and the persistently high PPI in China have restricted the room for monetary policy shifts. From a micro perspective, as copper prices rebounded, downstream consumption was once again restrained. The recent market rumors that BHP Billiton is threatened by a strike may cause some disturbance to the market, but the trend of copper depends on demand and liquidity, and the general trend of supply recovery will not change.
The economic outlook has weakened, and consumption has not seen significant expansion
In the United States, durable goods orders in the United States in June fell far short of expectations, with a month-on-month increase of only 0.8%, expected to be 2.2%, and 2.3% from the previous value. In addition, from the perspective of inventory, the manufacturing industry has basically completed replenishment, especially the year-on-year growth rate of inventory in the automotive industry has hit a high point in recent years. In June, the year-on-year growth rate of U.S. auto and parts inventories hit the highest level on record, reaching 17.68%. The U.S. auto industry is about to enter the destocking stage.
In China, from the perspective of industrial output and profits, the soaring price of raw materials highlights the structural distortions of upstream profit accumulation and squeezed midstream and downstream, which may lead to a continued slowdown in manufacturing investment growth in the future. The leading indicator, China Mining Manufacturing PMI, continued to slow down to 50.4 in July. Although it is still expanding, its expansion rate has slowed down. Among them, we see that new orders for manufacturing and new export orders are still declining in July, while the inventory index for finished goods rose in July, but the inventory index for raw materials fell. This means that China’s manufacturing industry has entered a stage of passive replenishment and will soon enter the initiative. Inventory stage. From historical experience, copper prices tend to fall during the active destocking stage.
From a micro perspective, the drop in copper prices in mid-to-early July once stimulated downstream replenishment in stages, but after copper prices rebounded again in late July, downstream purchases were suppressed.
At present, domestic copper consumption is mainly in electricity, real estate, transportation, home appliances and light industry. If copper is used as the downstream consumer area, then power cables consume the largest amount of copper, followed by copper pipes, and finally copper plates, strips and foils. At present, the growth rate of power cable and copper pipe consumption is very low, and the higher growth rate is mainly electrolytic copper foil for lithium batteries.
From the perspective of copper rods, the processing fee of copper rods can be used to measure downstream consumption. After the copper price rose sharply and exceeded the 70,000 yuan/ton mark, the purchase of copper rod downstream consumers decreased. On July 26, the 8mm copper rod processing fee rose to 650-850 yuan/ton, and there has been no market since then, and the sales of some copper rod companies have fallen by 50%. In addition, according to our research, the rush to install onshore wind power in the first half of the year has been significantly reduced, and wind power is a growth point for copper consumption this year.
Concerns about currency tightening eased, copper prices resisted falling
The Federal Reserve issued a July interest rate resolution. The FOMC voted unanimously to maintain the target range of the federal funds rate unchanged at 0~0.25%, maintain the excess reserve interest rate (IOER) at 0.15%, and maintain the discount rate at 0.25%, which is in line with expectations. . We believe that under the circumstances of the slowdown of the US economic recovery and the spread of the global Delta mutation virus, the long-term dollar interest rate declines. With the high inflation in the United States, the decline in the short-term real interest rate of the dollar and the fall of the high dollar index will stimulate the short-term rise of copper prices.
Increased strike risk, but does not affect the momentum of supply recovery
On July 31, the Escondida Copper Mining Union stated in a statement that its 2,164 members (99.5% of the voter) had chosen to reject the BHP Billiton Group’s final contract regarding salary requirements, which led to an increase in the risk of Escondida copper workers’ strike. BHP Billiton holds a 57.5% stake in the Escondida copper mine. The strike at the Escondida copper mine in the first quarter of 2017 caused a 61.4% year-on-year decrease in BHP Billiton’s copper mine output.
However, we believe that the copper mine strike has little effect on the trend of copper supply recovery. On the one hand, in the first quarter of 2017, the price of copper rose and fell. The reason was that other copper mines increased production. The actual reduction in global copper mine output in the first quarter of 2017 was only 2.8%. On the other hand, with the high copper price, the copper mine project that will be postponed in 2020 is expected to be put into operation in 2021 and 2020. At present, the global supply of copper ore has increased significantly. As of July 30, the spot processing fee for China’s imported 25% copper concentrate rose to US$52 to US$57/ton.
Generally speaking, we believe that under a stagflation-like environment, copper consumption is likely to fall back. However, because the currencies of China and the United States are not in a hurry to tighten, the investment demand brought about by loose liquidity will not quickly ebb, thus making Copper prices will fluctuate at high levels in the short term, creating a dilemma. The risk of a copper mine strike is only a short-term disturbance, and the trend of recovery of copper mine supply growth will not be reversed.