Copper prices returned to highs on unexpected positive domestic macroeconomic news

Copper prices opened higher after a slow recovery in the week ending January 26. The US dollar briefly exceeded 103 as expectations of a recent interest rate cut by the Federal Reserve weakened, weighing on copper prices. Chinese A-shares hit record lows in the first half of the week, which depressed domestic macroeconomic sentiment. The People’s Bank of China (PBOC) unexpectedly announced a reserve requirement ratio cut in advance to restore market confidence. Copper prices rebounded sharply, with LME copper prices approaching $8,600/mt and SHFE copper prices returning to the 69,000 yuan/mt mark.

The January PMI data released by the United States during the week was still strong and higher than expected. The market thus re-evaluate the timing and extent of the Federal Reserve's interest rate cut this year. The shipping crisis has been difficult to resolve. The US dollar remained strong, which suppressed copper prices in the first half of the week. The European Central Bank kept interest rates unchanged. However, the lingering geopolitical conflicts may continue to affect European inflation data. In addition, Europe is still expected to have an economic recession. The European Central Bank has become particularly cautious in cutting interest rates, and the market has gradually expected that interest rate cuts will occur in the second half of the year.

The Bank of Japan announced that it would maintain the current monetary policy unchanged and continue to focus on the 2% inflation target.

As the PBOC announced "requirement reserve reduction + targeted interest rate cut", foreign investors quickly entered, and A-shares returned to above 2,900. The improved market sentiment bolstered copper prices. However, with the rise in copper prices, the already weak pre-CNY stocking sentiment in the downstream was further suppressed. The oversupply resulted in large contango structure of contracts. Copper concentrate TCs continued to fall, and the price of sulphuric acid were also falling, narrowing profits of smelters. However, according to SMM survey, the vast majority of smelters will not reduce production or even stop production in a month. The import window remaining open will drive inflows of imported cargoes. As such, stock accumulation will be as significant as year-ago levels.

According to SMM survey, some downstream companies will close for CNY holidays in early February and are expected to restock in the week of January 29. In view of counter offers from downstream buyers, spot copper is unlikely to trade with premiums. The Federal Reserve is expected to keep interest rate unchanged. The US dollar is expected to be strong, which will suppress copper prices. LME copper is expected to trade between $8,300-8,650/mt in the week of January 29 and the most active SHFE copper contract prices will fluctuate between 67,500-69,500 yuan/mt. Spot copper will trade with discounts of 150 yuan/mt to premiums of 50 yuan/mt amid an oversupply.