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SMM believes the backwardation structure of SHFE will weaken in the future. All our following discussions are based on the current US tariff levels.
First, on the supply side, domestic copper cathode supply disruptions were lower than expected, with persistently high domestic production. Marginal improvements in copper scrap imports and inventory adjustments by major copper cathode importers have increased expectations of SHFE inventory buildup, weakening the backwardation structure:
- SMM forecasts China's full-year 2025 copper cathode production at 12.57 million mt, with H1 production estimated at 6.5946 million mt and H2 output remaining around 6 million mt. Domestic copper cathode production cuts are unlikely. As 2025 marks the final year of China's 14th Five-Year Plan, copper smelters have greater incentives to maintain production levels.
- Since May, China's copper scrap imports have continued to rise, significantly supplementing copper cathode raw material sources. From the end of last year, constrained by market pessimism over potential US tariff policies under the new administration, scrap traders had already reduced imports from the US. Earlier foreign media reports highlighted high US copper scrap inventories—regardless of accuracy, this indicates the US cannot absorb its own scrap supply. On one hand, US imports from Canada and Mexico have marginally declined, forcing these countries to seek alternative outlets, with Asian nations like China becoming primary destinations. On the other hand, US exports to Honduras, Dominican Republic, Thailand, and Pakistan have increased, with these countries processing and re-exporting scrap to China, leading to China's rising marginal imports from them.
- Recent foreign media reports indicate Glencore has been purchasing Russian copper on the LME for shipment to China. LME data shows Rotterdam delivery warehouses received requests for approximately 15,000 mt of Russian copper over recent trading sessions. This will accelerate LME inventory drawdowns, deepening its backwardation structure while SHFE's backwardation weakens.
Second, on the demand side, unsustainable high copper consumption, coupled with anticipated global copper cathode logistics normalization post-US tariff implementation, signals a weakening backwardation structure.
- H1 copper demand has front-loaded consumption at the expense of H2, making strong apparent demand unlikely in H2. Record grid investment, a robust PV installation rush, traditional peak consumption seasons, increased copper cathode demand due to scrap shortages, and a 90-day export rush following the US suspension of 24% tariffs on China all contributed to demand growth from January to April. However, the good times did not last long. Such significant demand could not be replicated in the second half of the year (H2), and copper consumption in H2 was like a spent arrow, with no new bright spots emerging.
- Since the end of last year, the global flow of copper cathode has been influenced by the fluctuating expectations of US tariffs. Consequently, the unresolved US tariff policy has directly led to an excessively large LME-COMEX price spread. As a result, the US has absorbed a significant amount of copper cathode from South America, China, Africa, and Europe. This has indirectly caused a supply gap for copper cathode in some parts of Asia. For instance, Southeast Asian countries have turned to sources in China, Japan, and other countries to make up for their domestic supply shortages, leading to an increase in copper cathode premiums in Southeast Asia. Meanwhile, China has sought copper from Africa and EQ copper to fill its domestic gap. On the one hand, as tariff policies become clearer and the progress of the Section 232 tariff investigation advances, the LME-COMEX price spread will not fluctuate due to tariff expectations. The copper cathode that was previously siphoned off and hoarded by the US will also flow back to regions outside the US. On the other hand, the ramp-up of production at the Manyar and PT Amman smelters in Indonesia and the Adani smelter in India has increased supply in Southeast Asia. Together, these factors have led to a decrease in demand for copper cathode from China in some parts of Asia in H2.
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