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[agency Review] domestic demand may be weak in peak season. Copper price fluctuates in a wide range in the short term.
Sep 10,2020 10:44CST
The content below was translated by Tencent automatically for reference.

SMM News: in the first half of this year, copper prices appeared macro plus fundamentals double drive, in the late third quarter, the support of macro expectations has weakened, the market is more focused on fundamentals, the sustainability of copper demand recovery is one of the key issues. To this end, before the approach of the peak season, the author adopted the way of field research, and Ningbo, Yixing and other areas of copper and cable enterprises conducted in-depth communication, the main findings are as follows.

Electroweb lacks stamina for orders.

The cable is difficult to cash in the peak season.

The cable enterprises surveyed generally reflect that orders are very good in the second quarter and weak in the third quarter, especially the month-on-month decline in orders in August is relatively obvious. According to the extrapolation of orders at this stage, enterprises generally believe that there is a greater possibility of a sluggish peak season in September and October. From a downstream point of view, the decline in Electroweb delivery orders has a greater impact on cable enterprises, and there is no sign of a pick-up in orders in the short term. Demand for copper wires such as home appliances and cars shows signs of improvement from the previous month and is expected to continue to grow. Real estate enterprises' demand for cables is lower than expected.

Judging from the bids of China's National Electroweb and South China Electroweb (hereinafter referred to as "the two networks"), the volume of bids increased last year, resulting in more delivery orders in the first half of this year. Copper cable deliveries rose nearly 60 per cent in the first half of 2020 compared with the same period last year, mainly in the second quarter, according to China's national Electroweb. In addition, due to the impact of the epidemic this year, some orders delivered in the first quarter were postponed to the second quarter, which led to very good orders from domestic cable companies in the second quarter.

The biggest change is in the second half of the year, the orders delivered by the two networks in the second half have been insufficient, and the bidding that began in the fourth quarter is mainly related to next year's orders. The author believes that from September to October, the orders delivered by the two networks will not change significantly, according to the current data, there will be a significant decline compared with the same period last year. From the bottom up, it is inferred that the orders of cable enterprises in the two networks are expected to remain weak.

Compared with the two network cables, the demand space of civil cables is expected to be more optimistic. In terms of domestic demand, home appliances, automobiles and other industries are still in the stage of continuing to repair, and there is still room for improvement in the demand for cables. In terms of external demand, due to the impact of the epidemic and trade frictions, cable exports have declined significantly this year, mainly in Europe, the United States and other countries and regions. The author believes that as the overseas epidemic is gradually brought under control and the stimulus policy gradually takes effect, overseas orders are expected to improve, but trade frictions are still one of the uncertain factors.

Downstream replenishment constraints enhanced

In the second quarter, downstream enterprises appeared a round of replenishment "upsurge", on the one hand, orders are busy, on the other hand, the price of raw materials is on the low side. According to the research feedback, some enterprises were obviously overbought in the second quarter, and after orders weakened in the third quarter, the digestion of raw materials slowed down, and the high copper price fluctuated, and some enterprises slowed down the pace of purchasing raw materials. Some enterprises even sold raw material stocks in the spot market.

For cable enterprises, copper prices are generally less than 50,000 yuan / ton in the closed contracts signed with the lower reaches. For this part of the order, cable enterprises need to look for pricing opportunities of less than 50,000 yuan / ton. Therefore, in the process of the sharp decline in copper prices in the early stage, the orders of copper rod enterprises have increased significantly. In the coming period of time, companies will be more price-sensitive when purchasing raw materials before the volume of final orders increases again. On the other hand, this behavior essentially limits the fluctuation of copper prices.

In the middle and late third quarter, the capital flow of downstream enterprises showed signs of tightening. One of the logical supports for rebuilding inventory downstream in the early period is the monetary easing environment during and after the epidemic, and now there are signs of tightening of funds. To a certain extent, the replenishment of raw materials by downstream enterprises will be restricted.

Infrastructure development in the first half of the year

Civil support in the second half of the year

According to the survey, the structural change in demand in the lower reaches of this year is relatively obvious, and the demand for infrastructure in the first half of the year is strong. in addition to the demand for Electroweb and electricity, rail transit projects and airport construction have also brought a lot of increments, and the demand for civil use is weak, mainly because consumer demand has been hit hard, including consumer appliances, automobiles, electronics and other consumer goods. The demand structure changed again in the second half of the year, and some of the strong infrastructure demand in the previous period showed signs of weakening, especially in the area of Electroweb, but the weak civil consumption in the earlier period began to gradually improve, but the degree of improvement was relatively limited, and stronger downstream drivers were still needed.

In terms of domestic and foreign demand, the export of copper and cable was greatly affected in the first half of the year. On the one hand, it was affected by trade frictions, mainly reflected in the orders of the United States, and on the other hand, the impact of the overseas epidemic was more obvious in the second quarter. At this stage, overseas orders are improving in stages, but the degree of improvement is still limited, and the repair of foreign trade orders continues to be affected by trade frictions between China and the United States. From the perspective of domestic demand, it is very strong in the second quarter and weak in the third quarter, but the author believes that it is too early to say that there is an inflection point in domestic demand, but structural changes need to be paid attention to.

The new demand is still driven, and there is also room for in-depth transformation of domestic old residential areas concerned by the market in the early stage. since the beginning of this year, power construction has rebounded more obviously, the construction of photovoltaic and wind power stations, and the construction of pumped storage power stations will also bring a lot of demand. In addition, due to the destruction of cities and towns caused by floods in the south, it is expected that the reconstruction of urban infrastructure will also bring a lot of demand in the coming time.

Investment suggestion

Macro expectations of over-trading in the early stage of the market, starting from the third quarter, the focus of trading has gradually shifted to micro fundamentals, the pricing of subsequent rising space for copper prices will also depend more on fundamentals, and the demand factor is the key. From the survey, as the main force of domestic demand lies in cables, downstream docking Electroweb investment, at this stage, the peak season from September to October is more likely to be sluggish, to a certain extent, will limit the next domestic destocking, but home appliances, automobiles, electronics and other civilian copper demand areas still have room to develop, domestic demand inflection point is still too early. The repair of overseas copper demand has just begun, overlaying the continuous removal of overseas inventories, the author believes that the medium-term upward trend of copper prices has not been broken, but the weakness of domestic demand may restrain the rising space.

To sum up, the author is cautiously optimistic about the medium-term rising trend of copper prices, and the future of the core variables lies in macro expectations and the repair of overseas demand. The main point of the reversal in copper prices is the marginal withdrawal of stimulus policies and the weak stamina of the recovery in global demand, which is not expected to be reflected this year. In terms of price, the author believes that the high point of the second round of rebound in copper prices will be less than 7000 US dollars / ton, and short-term copper prices may continue to show a trend of wide volatility. From a strategic point of view, it is recommended that in the early stage, more than 52000 yuan / ton above every high profit, waiting for macro and fundamental signals for the next step of guidance.

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