Accelerated Inventory Reduction and the Turning Point of Inventory [SMM Analysis]

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After experiencing an inventory buildup during the Chinese New Year holiday and the accelerated supply of copper cathodes in the first quarter exceeding expectations, which led to a rapid accumulation of social copper cathode inventory in China, the total social inventory of copper cathodes reached a peak on March 3rd. Following that, due to factors such as improved downstream consumption, better price ratios, and continuous export growth, the inventory of copper cathodes saw a sharp decline starting from early March. Does this indicate that the inventory turning point has arrived? Is this trend of inventory reduction sustainable?

On the supply :

1. As we enter the second quarter, the number of smelters undergoing maintenance has increased compared to the first quarter, which has led to a higher interference rate in copper cathode production. It is very likely that the domestic copper cathode output in the second quarter will fall short of expectations and will not be as high as the first quarter’s output.

2. As mentioned in previous SMM analysis, the escalating trade war has led to challenges in raw material supplies, such as copper concentrates and scrap copper, from the United States to Chinese smelters. Particularly, scrap copper imports have faced greater challenges, which is expected to lead to a larger reduction in copper cathode production due to already limited raw material supplies in Chinese smelters.

3. Since February, with the changes in domestic and international price ratios, a two-month export window has opened. The continued opening of the export window has significantly increased the export of copper cathodes, further accelerating the reduction of domestic social inventory.

On the demand :

1. In the first half of 2025, the photovoltaic industry will experience a “rush to install” race against time. The introduction of strict restrictions on commercial and industrial distributed photovoltaic projects in the "Distributed Photovoltaic Power Generation Development and Construction Management Measures" and the publication of the electricity price reform document on February 9th have further intensified the industry's anxiety. This rush is strongly driven by the "531 New Policy," which is described as "the most market-oriented in history." It is expected that the photovoltaic industry’s “rush to install” will lead to a concentrated release of copper cathode consumption in the first half of 2025.

2. 2025 is the final year of the "14th Five-Year Plan," with state-owned power enterprises focusing on accelerating green transformation and achieving high-quality completion of annual tasks. For the State Grid, investments will be increased to a historical high of 653.5 billion yuan, while the Southern Power Grid's fixed asset investment will rise to 175 billion yuan, setting another historical record. The large scale of investment from both grids will eventually be reflected in the operating rates of SMM’s copper wire, enamelled wire, and copper rod sectors.

3. Some might think that the intensifying trade war will severely suppress orders for white goods from some developed countries, leading to a continuous deterioration in copper cathode demand. Of course, Chinese companies cannot avoid short-term pain, as there are no winners in a trade war. However, in 2024, China’s home appliance industry had a total export value of 112.42 billion USD, with 20.71 billion USD exported to the United States, a 4.3% increase year-on-year. However, the share of exports to the US has dropped from over 20% a few years ago to about 18%. This structural change is behind the accelerated shift of home appliance production to Mexico and Southeast Asia, as companies adjust their strategies to bypass exports to the US.

In summary, SMM believes that there is a significant possibility that copper cathode social inventory will continue to decrease in the second quarter. In other words, the inventory turning point was already apparent in early March.

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