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The rapid progress of "Dr. Copper" is also about to usher in a bubble adjustment?
Jul 16,2020 08:34CST
translation
Source:Futures daily
The content below was translated by Tencent automatically for reference.

SMM News: the copper market has continued to rebound since April, and domestic and foreign copper prices reached a new high in nearly two years in July, which is mainly the result of loose global liquidity and demand recovery repair under the resumption of the superimposed economy. However, judging from many indicators, many sectors, such as consumption, manufacturing investment and exports, have not returned to their pre-epidemic levels. Although economic indicators in Europe and the United States have rebounded from the previous month, they are still growing negatively compared with the same period last year, which means that consumer demand for copper may not be the main cause of the rise in copper prices, but investment demand brought about by loose liquidity is the driving factor.

In the short term, the copper market is still dominated by financial attributes, especially since the rise in Chinese A-shares since July to stimulate market risk appetite, the stock market cyclical plate made up, also led to the rise of cyclical commodity copper. From the perspective of historical data, except for the A-share bull market in 2015, the CSI 300 index and copper prices move in the same direction, but most of the time copper prices are the leading indicators of the CSI 300 index. this means that the rise in copper prices is mainly the result of emotional transmission and liquidity spillover.

The global economic repair spurred risk appetite, and JPMorgan's global manufacturing PMI continued to rise in June, but did not return above the 50% divide, rising to just 47.8%. On a month-on-month basis, JPMorgan Chase's global manufacturing PMI rebounded for two consecutive months in May and June, benefiting from the gradual lifting of quarantines in overseas economies.

Loose liquidity boosts investment demand for copper

The aggravation of the Xinguan pneumonia epidemic has not led to a large-scale resumption of blockade measures in the United States, and the market risk appetite has not been hit as a result. At a time when the epidemic is accelerating, US President Donald Trump has insisted on reopening economic activity and requiring schools to start classes. The US stock market is still hitting record highs, the Federal Reserve is violently rescuing the market, frantically releasing new money, and liquidity is flooded. Almost all indicators related to money are at an all-time high. The real economy is in the doldrums and cannot absorb much of the newly released liquidity, so more and more funds are pursuing limited assets.

What is noteworthy is the rebound in dollar liquidity, superimposed by the expansion of US public sector debt and rising deficits, and the continued depreciation of the dollar has further boosted investment demand for copper. From the long-term perspective of the depreciation cycle of the US dollar, copper prices generally rise, and the main logic lies in: the depreciation of the US dollar corresponds to the Fed's monetary easing, the rebound of US dollar liquidity, and the increasing pressure on the US economic recovery. Dollar liquidity will flow from the United States to emerging market stock and commodity markets, leading to higher inflation expectations.

In addition, the interference of the epidemic with the supply of copper mines in South America has also given a significant boost to copper prices. According to the news released by Chile's National Copper Mining Workers Association on July 7th, a large number of miners and workers in major copper mining enterprises in Chile have diagnosed new crown pneumonia, and the cumulative number of confirmed cases has exceeded 3500, of which the Cerro Colorado mine, El Teniente mine and Chuquicamata mine have the largest number of cases. From the perspective of copper concentrate processing fees, as of July 14, 25%Min imported copper concentrate spot processing fee (TC/RC) is 51mi 58 US dollars / ton, down 1 US dollars / ton compared with the end of June. Some smelters reflect that recently copper concentrate traders have offered few quotations, giving priority to ensuring the supply of long orders, and domestic smelters generally adhere to the bottom line of processing fees of US $50 / ton. However, at present, the tension in the copper mine has not yet been transmitted to the copper smelting process. Data show that in June 2020, 22 sample enterprises surveyed produced a total of 699000 tons of cathode copper, a slight increase of 0.6 per cent over the same period last year and 0.9 per cent month-on-month growth.

Copper price is strong but faces adjustment risk

At present, the copper market is facing two major adjustment risks: first, the tension in domestic copper supply begins to ease, copper spot prices fall, copper imports rise, refined copper import premiums fall and domestic copper inventories rise for two consecutive weeks, and copper enters the accumulation stage. Data show that as of July 10, the explicit inventory of the three major exchanges, including COMEX, LME and Shanghai Stock Exchange, has rebounded to about 400000 tons, of which the explicit copper inventory of the previous period has returned to about 137000 tons, only slightly lower than the level of the same period last year.

Second, both investment demand and consumer demand are falling. In terms of domestic consumer demand, from the perspective of high-frequency data, including daily coal consumption, land transaction area, commercial housing sales area, cement and concrete price index decline, all mean that consumer demand is actually falling month-on-month. From the monthly data, compared with the same period last year, consumer demand is actually flat or even negative growth, and the peak of consumer demand brought about by the backlog of orders has passed. On the other hand, the investment demand is reflected in the tightening of the margin of liquidity. in view of the recent sharp rise in the stock market, as well as illegal funds entering the market and capital idling arbitrage, on the one hand, the central bank requires banks to conduct self-examination. on the other hand, the temporary measures introduced during the epidemic were completely withdrawn on June 30th, such as 300 billion yuan in re-loans and 500 billion yuan in additional re-loan rediscount. As of July 7, 1 trillion yuan of inclusive re-lending has also completed 374.7 billion yuan, and the period of loosest liquidity has passed.

Therefore, for COMEX copper, the fund investment-driven rally may slow down, and the global copper market still depends on Chinese demand, while the Chinese copper market faces constraints of accumulation and liquidity marginal tightening again. It is believed that the stage of accelerated rise in copper prices has passed and is entering the adjustment stage of squeezing bubbles. It is recommended that investors pay attention to the COMEX copper futures contract (the contract code: HG), captures investment opportunities in the copper market. It is worth mentioning that the COMEX copper market saw a marked increase in trading volume during the Asian trading session when copper prices plummeted in March, meaning the product is also an important risk management tool for investors.

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