On the macro front, copper prices rose first and then fell this week, rebounding somewhat toward the end of the week, with the price center moving higher WoW. Early in the week, the US dollar shot up and then pulled back, and LME copper strengthened accordingly; in China, a rapid decline in inventories, tight spot supply, and a further widening of the nearby Back price spread between futures contracts pushed SHFE copper higher. During the week, LME copper touched a high of $14,384/mt, and the most-traded SHFE copper contract climbed to a high of 109,030 yuan/mt. Subsequently, US July PCE rose to 3.7% YoY, inflationary pressure resurfaced, the market raised expectations for US Fed interest rate hikes, and a stronger US dollar drove copper prices lower. Toward the end of the week, the US dollar did not rise further; after the bearish impact of PCE was digested over a round, coupled with bulls adding positions again, copper prices recouped part of the losses. On the geopolitical front, the US-Iran agreement saw renewed uncertainties, but it has not caused actual supply disruptions; its impact on copper prices was weaker than that of the US dollar. As of 9:30 a.m. Beijing time on August 28, LME copper closed at $14,301/mt, and the most-traded SHFE copper contract closed at 108,590 yuan/mt.
On the fundamentals, as of August 27, SMM copper inventories in major regions nationwide decreased by 24,900 mt from last Thursday to 109,500 mt, down 17,600 mt YoY. In addition, overseas exchange inventories continued to diverge: COMEX inventories kept accumulating, while LME inventories, after increasing last week, declined again this week. As of August 28, the COMEX-LME price spread had narrowed to -$11.17/mt. The cross-market arbitrage incentive that previously drove copper flows to the US weakened, but the LME inventory buffer is being eroded; vigilance is still needed for near-term squeeze risk, which provides support for LME copper. A weaker SHFE/LME price ratio led to a continued widening of import losses; as of the time of writing, the import loss for the September contract was about 1,900 yuan/mt, and the export window reopened. However, the opening of the window has not yet translated into actual export growth. Port congestion in many parts of China has led to tight booking and shipping delays, while low social inventory and tight smelter supply have also limited available exports. Therefore, tight domestic circulating supply mainly stemmed from impeded import replenishment and insufficient available supply, rather than large-scale diversion to exports. Demand side, high copper prices continued to suppress downstream procurement; secondary copper rod enterprises saw average order performance, and stockpiling for the peak season had not yet started noticeably. This week’s decline in domestic inventories was mainly driven by insufficient supply replenishment, rather than a broad-based improvement in end-use consumption.
Looking ahead to next week, first, focus on Fed Chairman Walsh’s speech at the Jackson Hole annual meeting on August 28, as his policy stance will affect next week’s opening. In addition, the macro pressure brought by this week’s PCE rising to 3.7% will still persist. The rebound in inflation strengthened the rationale for the US Fed to maintain a relatively tight policy stance; expectations for US Fed interest rate hikes and the US dollar will remain supported ahead of the non-farm payrolls data release. Next week, the key focus will be the US August non-farm payrolls report. US August non-farm payroll additions are expected to return to positive growth, but the increase will remain at a low level; continued cooling in the labor market will weigh on expectations for US Fed interest rate hikes, and a pullback in the US dollar will support copper prices. Conversely, if non-farm payrolls are significantly stronger than expected, expectations for US Fed interest rate hikes will heat up further, and a stronger US dollar will widen copper’s losses. If the non-farm payrolls data continue to deteriorate, and the market begins to worry about a US recession and declines in manufacturing and investment demand, then even if the US dollar weakens, copper prices will fall as demand expectations worsen. Renewed destocking on the LME and low inventories in China will limit the downside in copper prices, but high copper prices will still suppress downstream procurement. Macro pressure will dominate the direction of copper prices, while low inventories mainly provide bottom support. LME copper’s center is expected to edge up slightly next week, trading at $14,100–$14,450/mt; the most-traded SHFE copper contract is expected to follow the gains, trading at 107,500–109,600 yuan/mt.
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