Will Copper Market See Resource Exhaustion amid Continued Declines in Global Copper Inventory?

SHANGHAI, Nov 19 (SMM) - The global copper cathode inventory has declined since the second quarter of 2021, down from 1.2 million mt at the end of April to only 519,000 mt as of November 12 (last Friday), a drop of 56.8%. The backwardation of LME cash to the three-month contract soared to above $1,100/mt amid a short squeeze in mid-October, the highest since the 1970s, reflecting tight inventory.

But SMM believes that there is no need to worry about the occurrence of resource exhaustion.

The disruption to the supply side and the slow recovery of the global supply chain have driven the decline in the global copper inventory this year. The recovery in the economies was mixed amid the COVID-19. The overseas manufacturing has not yet recovered to the pre-pandemic level. The shortage of global transportation capacity and the congestions at ports have caused a large volume of copper cathode to strand at ports, which has led to an increase in global invisible inventories.

China is the key driver for this round of declines in global copper inventory. The global copper cathode inventory decline totalled 680,000 mt, and China accounted for 81.3% of the decline, or equivalent to a drop of 553,000 mt. Overseas inventories have decreased by 128,000 mt.

The pivot of inventory will be driven by the improvement of consumption and global logistics.

At present, consumption in European and the US has peaked, and it is difficult to see a marginal increase in consumer demand. In China, with the exception of new energy and electronics-related sectors, there are no highlights in the consumption in other sectors. This was reflected by the operating rates of copper semis sectors. In addition, the sharp drop in China's real estate data undoubtedly increased the long-term hidden risk of consumption. Over 20% of copper consumption in China is driven by real estate, so the demand for copper cathode is unlikely to be strong next year.

Regarding global logistics issues, with the coverage of vaccines and the further unblocking of overseas countries, the shortage of shipping capacity is expected to ease after the first quarter of next year, so as to realise a smooth outflow or invisible inventory, turning the inventory into visible inventory.

On the supply side, the output of domestic copper cathode fell short of expectations in the second half of the year due to power rationing, shortage of copper anode as well as copper scrap. According to SMM survey, the domestic copper cathode output in October was 789,400 mt, which fell below 800,000 mt for the first time this year. But with the lifting of power rationing on copper smelters in mid-to-late November, the copper cathode output in November is expected to rebound to 819,000 mt amid production ramp-up. This combined with the release of the resumed capacity at Dongying Fangyuan is expected to grow copper cathode output to over 850,000 mt.

The regulating effect of copper scrap in the copper supply and demand chain cannot be ignored. As far as SMM understood, the price spread between copper cathode and copper scrap is around 1-2 months ahead of the domestic social inventory (excluding the bonded zone inventory). The current social inventories have reached a historic low. We shall be wary of the potential increase in the copper scrap consumption boosted by the surge in the price spread between copper cathode and copper scrap, which will lead to an accumulation of domestic inventories.

The supporting factors for the decline of domestic inventories have weakened. We expect the pivot in the domestic inventory will occur in December in light of the increase in the domestic supply driven by higher domestic copper cathode output and a potential decline in demand. As such, the resource exhaustion resulting from continued inventory decline is unlikely to occur.