[institutional point of view] can copper prices continue to rise in 2021?

Looking forward to 2021, copper prices are expected to continue to rise as a whole. The core driving logic lies in: the macro liquidity environment of major overseas countries is still loose, and the overall interest in non-ferrous metals; although the pace of global economic recovery is different, but the tone is upward, there will be a sustained and clear boost from the real demand side. From the pace of operation, the gap between supply and demand of refined copper is expected to be the biggest in the second quarter, that is, the high price of copper or at this stage.

Liquidity in major economies remains loose: bullish non-ferrous metals

As a result of the sudden epidemic, the world was plunged into the plight of suspending production and production, economic fundamentals and financial markets were hit hard, market risk aversion was stimulated to a higher level, and even gold, which was regarded as a safe haven asset, was sold off, and the US dollar once became the most sought-after asset, thus the liquidity crisis broke out. In order to hedge against the impact of the epidemic, many countries around the world have launched loose monetary policies to inject abundant liquidity into the market, and the growth rate of money supply in major economies has increased significantly. However, today, we can see that apart from the basic recovery of China's economy, there are still repeated epidemics in Europe and the United States. for the current countries in Europe and the United States, considering the marginal decline in the impact of the epidemic, the intensity of relaxation is not as strong as that in the first half of the year, but under the circumstances that the epidemic has not improved, loose monetary and fiscal policies still need to be maintained.

On August 28th the Fed released the results of its review of the monetary policy framework, which does not change the monetary policy target of full employment and long-term inflation of 2%. Based on current inflation and employment data, core PCE was 1.4 per cent in October, still a far cry from the Fed's 2 per cent target. The unemployment rate has continued to fall to 6.9% since April, reflecting that the job market is in a repair channel, but the decline in new non-farm payrolls since June and the fact that permanent unemployment is gradually higher than temporary unemployment shows that the job market lacks momentum. A loose monetary environment is particularly necessary for the United States.

On December 10, the European Central Bank decided to step up its loose monetary policy, stressing that uncertainty remains high in the short term and will continue to maintain favorable financing conditions to maintain medium-term inflation stability. At present, inflation in the euro zone is extremely low, at-0.3%; GDP growth in the third quarter was-4.3% year-on-year, lower than the level before the epidemic. In order to boost confidence in economic growth and inflation, Europe will maintain a loose monetary policy and is likely to continue to do so.

In 2009-2011, Europe and the United States Synchronize increased and maintained loose monetary policy, copper prices out of a wave of bull market, based on the above judgment of European and American monetary policy, loose monetary policy in 2021 will still "protect" global liquidity, copper prices are expected to rise. In addition, the Fed's long-term low interest rates will damage the dollar's credit base, thus further dragging down the dollar index. Based on the negative correlation between the dollar index and copper, the depressed dollar index weakens the upward pressure on copper prices.

The demand of the real economy is up: continue to boost the price of copper

1. The new leadership of the United States tends to be a moderate dove, and the loose fiscal policy will be implemented.

On November 29, the farce of the US election finally came to an end when the White House approved the formal handover work of the Federal General Administration of the United States, and the election of Biden as the 46th president of the United States was almost a foregone conclusion. Judging from Biden's policy propositions during the campaign, he favours a larger fiscal stimulus. Biden nominated former Federal Reserve Chairman Yellen as Treasury Secretary of the next US government. Based on Yellen's moderate dovish policy tendency when she served as Federal Reserve Chairman, Yellen may still maintain this state during her tenure as Treasury Secretary. And Yellen tends to promote employment rather than control inflation. Yellen has also said many times this year that fiscal policy should play a more active role. Yellen is expected to be Biden's hub for bipartisanship and monetary and fiscal coordination.

On December 8, U.S. Treasury Secretary Nuchin proposed a new 916 billion U.S. dollars anti-epidemic relief package to House Speaker Pelosi. The "bulk" of the plan is the same as the $908 billion stimulus package of a cross-party group. At present, there has been no progress in the negotiations on the rescue package, but there has been an increase in expectations for the implementation of a new round of financial support plans a year ago.

two。 The overseas economy has rebounded and the replenishment cycle of the physical industry has been launched.

In the United States, for example, since April, the year-on-year growth rate of US manufacturing inventory has continued to slow from 1.3% to-1.2%. Among them, the year-on-year growth rate of finished goods and raw material inventory has dropped to-4.1% and-0.5% respectively, while intermediate goods inventory has been overstocked. its inventory growth rate rose from 1.3% to 2.4% year-on-year. At the industry level, inventory growth declined sharply in metal processing, machinery and equipment, furniture, basic metals, electrical equipment and other durable goods production industries, as well as non-durable goods production industries such as plastics and rubber, textiles, chemicals, textile raw materials, etc. With the continuous recovery of consumption, in the case of low inventory, the replenishment cycle of many industries in Europe and the United States has begun.

In the environment of falling benchmark interest rates in the US since 2019, falling long-term mortgage rates have spurred the recovery of the real estate sector, and the supply of new homes has been available for only 3.3 months a month, indicating that US real estate inventories have fallen to extremely low levels. The low level of real estate inventory and the increase of residents' purchasing power will boost the willingness of US real estate developers to replenish inventory, the US real estate business cycle will continue, and its related home appliances, building materials and other industry chains will benefit.

The average duration of the previous inventory cycle in the United States is 32 months, of which replenishment and removal are 16 months respectively, which is used as a reference for this replenishment cycle. In July 2020, wholesale and retail inventory began to pick up, which is regarded as the starting point of this replenishment cycle, which is expected to last until at least the third quarter of next year, but does not rule out the possibility that production and operation activities will resume and accelerate the pace of replenishment after the widespread use of vaccines, so as to reduce the duration of this replenishment.

3. The trend of domestic economic recovery is clear, and consumption and export-driven are relatively strong.

In 2020, China's export performance continued to exceed expectations, domestic demand showed a pick-up trend, while fixed asset investment played a role of counter-cyclical adjustment in the second quarter and then showed a downward trend. Looking forward to 2021, exports will remain resilient, domestic demand will pick up faster, and the structure of investment in fixed assets will be divided.

From the structure of the durable goods industry in the United States, we can see that the inventory growth rate of machinery, transportation equipment, electrical equipment, and electrical appliances, which is closely related to non-ferrous metals, was at a historically low level in that month, and the epidemic led to the dislocation of the pace of recovery at home and abroad, as well as the dislocation of output and demand abroad, providing a good opportunity for domestic exports.

The macro environment and regulation and control policies faced by the real estate industry have been marginally tightened, monetary policy pays more attention to the stability of macro leverage ratio, and the growth rate of social finance and new loans will move closer to the potential economic growth rate, restricting the growth rate of mortgage loans. the "three red lines" on the financing side of the real estate industry regulatory policy have been issued, requiring real estate enterprises to reduce debt leverage, and the growth of capital sources for real estate enterprises may be limited. However, in order to meet the needs of the "three red lines" policy, real estate enterprises further increase their dependence on sales rebates and maintain a tendency to "reduce access to land, maintain high construction, and improve completion". In the medium to long term, it is conducive to the poor growth rate of construction, construction and completion, thus boosting the post-cycle industry of real estate.

The growth rate of completion in October increased by 25.8 percentage points from the previous month, and the logic of completion and repair is expected to begin to evolve. Home appliances, as a post-cycle real estate industry, will usher in the release of demand, and the opening of offline retail channels will help to promote the delayed release of demand. In addition, the continuation of the overseas epidemic has disrupted the order of the home appliance-related industry chain, while China has absorbed a large number of overseas home appliance orders with the advantages of effective epidemic prevention and control and the integrity of the industrial chain and performance-to-price ratio. On the whole, the home appliance industry will maintain its high demeanor next year under the promotion of both internal and external efforts and the parallel of online and offline tracks.

The automobile sector has benefited from the improvement of the domestic macroeconomic environment, and with the support of various policies to promote consumption, residents' consumer confidence and willingness have been boosted, and monthly car sales have maintained a positive growth of six months compared with the same period last year. And the dealer inventory coefficient as a whole shows a downward trend, the automobile industry is basically determined to enter the business cycle. In addition, based on the first-mover advantages and economies of scale of China's new energy vehicles, as well as the huge market space, the new energy vehicle sector is expected to maintain rapid development in the next five years.

Europe should have the strictest carbon emission standards in the world, proposing to increase greenhouse gas emissions by 15 percentage points from the previous 40 per cent in 2030. According to the 2030 Climate Target Plan, the carbon emissions target for 2030 is expected to be further stringent on the basis of the original 59.4g/km, with a newly adjusted target of 47.5g gamma km. Such stringent carbon emission requirements in Europe have forced car companies to switch to electrification. In addition, EU countries have also introduced strong subsidy policies to promote the development of new energy vehicles.

The stock market is a barometer of the economy. after the impact of the epidemic in the first quarter, the profitability of the home appliance and automobile industry has continued to pick up, which proves that the economy is indeed recovering after the epidemic, and that the improvement in economic fundamentals has a positive effect on the commodity market, among which non-ferrous metals are the most beneficiary. Since April, the ferrous metals index has risen the highest, reaching 61.45%, followed by the non-ferrous metals index, which reached 45%.

4. The pressure of ore shortage in the smelter is alleviated, and the growth rate of supply is low before and after high.

As far as copper is concerned, the production and operation activities of copper mines in South American countries this year have led to a decline in global copper supply due to the slowdown in the epidemic, with global copper production falling 4.1 per cent from January to August 2020 compared with the same period last year. And due to the decline in logistics and transport capacity under the control of the global epidemic, the growth rate of China's copper imports declined rapidly in the second quarter. However, at this time, China's smelting capacity has recovered from the epidemic, production continues to release, and the pressure of copper supply shortage is increasing. Although South America gradually resumed production from the epidemic in the second half of the year, the growth rate of copper imports is still low, and the processing fees of Chinese smelters are also difficult to pick up. At present, the game between copper mining enterprises and smelters for the negotiation of processing fees next year is more fierce. It is expected that next year, the new investment and expected production plans postponed due to the epidemic will mainly focus on the second half of the year, including the increase in production capacity of large copper mine projects such as the underground part of Grasberg, Spence II and Kamoa, and the pressure on copper supply will be alleviated compared with this year, so it is expected that the growth rate of refined copper supply in 2021 will be high before and after.

The rising trend of copper price is expected to continue in 2021: the allocation value is prominent.

To sum up, on the one hand, in order to boost confidence in economic growth and stabilize inflation, major economies such as Europe and the United States will continue to maintain loose monetary policies, and abundant macro liquidity will be good for copper prices; on the other hand, economic fundamentals will continue to improve and refined copper supply and demand will be good. On the demand side, the demand base was low under the impact of the epidemic in the first half of 2020, and China, Europe and the United States, as the top three economies consuming refined copper, the economic recovery brought about an accelerated increase in demand. On the supply side, the increment of copper mine is mainly concentrated in the second half of the year, so the growth rate of refined copper supply is low before and then high.

Global inventories are currently in the 16th quartile of 2016-to-date inventory data, and inventories are further deregulated to increase the flexibility of rising copper prices. The gap between supply and demand converged in the second half of the year, the rising space of copper price narrowed and the pace slowed down

By observing the structure of COMEX copper and LME copper from 2018 to now, it is found that the long positions represented by COMEX non-commercial positions and LME investment funds will continue to improve the allocation of copper assets in the period of rising copper prices. The rising volatility brought about by rising copper prices, combined with its high value and easy storage characteristics, is more attractive to capital. It is expected that the rising trend of copper prices will continue in 2021, and the configuration value of copper will be further highlighted. (author unit: Societe Generale Futures)