The inflection point is coming? A brief Analysis of the recent trend of Copper Market

This paper intends to make a short-and medium-term analysis and forecast of the copper market, and before we officially begin, I would like to talk about the current economic cycle we belong to.

When it comes to the economic cycle, that is the Merrill clock, the four stages of the economic cycle, the recovery period, the overheating period, the stagflation period and the recession period. The trade war between China and the United States a few years ago has put the entire market into a period of stagnation, and the initial outbreak of the epidemic has made the market begin to decline again. This round of epidemic has now resumed all stages of the economic cycle. The initial stage of the outbreak is an accelerated recession stage. In the second half of last year, with the adjustment of economic policies of various countries, it began to recover. In the first half of this year, all kinds of commodities repeatedly reached record highs. Show obvious characteristics of overheating period, commodity is king, cash depreciation, inflation. So now, what stage of the Merrill clock are we at? Looking at the media now, we can see that they are trying their best to avoid talking about the word "stagflation inflation". They are reporting on stagflation phenomena and similar stagflation terms, but in addition to the relatively stable employment, other things such as inflation rate and CPI can be seen that they have at least entered the initial stage of stagflation.

So in the stagflation period, what will be the characteristics of the commodity? We can use the following set of "iceberg logic" to make a pictographic explanation. Icebergs are only a small part of the sea surface, and only most of those below the sea surface. Here, we regard the sea water as the current inflation level. The whole iceberg is the overall supply and demand situation of this species, and the part exposed to the sea is regarded as the marginal increment of supply and demand. Short-term stimulation is equivalent to building a tower on the iceberg, waiting for the stimulus to be over. The tower melts and becomes part of the overall supply and demand. The reverse is the same. In fact, the overall copper price can reach this level by relying on the overall rise of quantitative easing, the mismatch between supply and demand caused by the epidemic, the marginal growth expectations provided by new energy, and the impact of short-term stimulus.

Let's start with inflation. Where is copper's favorite macro environment? Generally speaking, in such a cycle of economic recovery, the Merrill clock shows the end of the recovery period to the beginning of the stagflation period, that is, inflation and employment data are in a rising state, but the stimulus of fiscal policy and monetary policy has not yet reached an exit stage and is still patient with inflation and economic recovery.

For example, the first half of this year is the favorite macro environment for copper, in which copper price is an inevitable upward process. This year, the core inflation rate of the United States and CPI can be said to have risen in the same way. in the short period of the steepest rise, that is, when the copper price hit an all-time high, inflation has already caught up with the outbreak of the economic crisis in 1970, so some experts are calling on the Federal Reserve to shrink its watch and raise interest rates as soon as possible to avoid the risk of falling into an economic crisis again. Judging from the information released by previous Fed interest rate meetings, there is growing concern in the market that it is getting closer and closer to the inflection point of overseas liquidity and closer to the policy margin. The market believes that even though the inflation and employment data are still strengthening in the later period, the policy has already begun to adjust, which is why it once fell to the 8700 position.

But the problem is that in the United States, the current employment data are too good, including non-farmers, although they are not as good as expected, but they are still improving as a whole, while these data continue to decline for the first time and have basically reached the level before the epidemic, so the Federal Reserve is not in such a hurry, and the taper, called in July is still testing efforts at the end of the year. After several speeches, the copper price immediately rebounded again, but the space has been opened, and the short-sellers are waiting for a signal.

In fact, the period between now and when taper defines the specific details is a process from macro support to restraint for copper. When the water is full, it will overflow, the peak will decline, and the moon will lose money. The four cycles of the Merrill clock will always repeat over and over again. It is only a matter of time before the market enters a recession again, but it will accelerate some of these stages through macro policies, such as the last financial crisis in 2008. The Fed decided at the end of 13 years that the taper, would raise interest rates by the end of 15, and it took two years to reduce QE. This time, the market is generally expected to start raising interest rates for the first time in the second half of the year after launching taper, to reduce QE at the end of this year, so the macro inflection point may begin to reflect this expectation at the end of the year, until the end of the second quarter of next year.

Looking at supply and demand, in fact, from the outbreak of the epidemic, and then to the treatment to the current vaccine coverage, it is a problem of mismatch between suppliers and consumers. In fact, each round of mismatch is reflected in the price, which can be found on the price curve.

Well, in the second half of this year, on the mining side, in fact, the overall supply of copper mines around the world has turned loose. The strike interference of major suppliers in South America, such as Chile and Peru, has been basically relieved. Although there are still some disturbances from the epidemic, according to the current rising TC and the newly released concentrate production capacity, the overall supply still tends to be loose, and even Chile's monthly concentrate production in August reached 990000 tons. It has exceeded the same period in previous years.

As for refined copper, the overall domestic output has actually been performing well before limiting production and electricity. The domestic mainstream view of refined copper output this year is still 10 million tons. When the data in the first half of the year are not particularly good, one of the rebounds in the second half of the year is the rebound in processing fees in the second half of the year. Another important thing is the price of sulfuric acid and other by-products, although it has now come down. However, some time ago, the market price of sulfuric acid in some areas has reached 1000 yuan, which is relatively small in history, which is also a stimulus to the smelter.

On the demand side, there will be an obvious difference between domestic demand in the second half of this year and the first half of this year. First of all, orders for infrastructure in the first half of the year are not very good, but automotive air conditioners and some export-related performance are relatively good. In the second half of the year, domestic consumption and exports began to decline at the end of the second quarter. At this time, the country will focus on infrastructure, and will gradually make efforts in the second half of the year. Infrastructure accounts for a relatively high proportion of overall copper demand, just like the rapid rise of copper demand in the second quarter of last year, when consumption and exports had not yet risen. In fact, infrastructure is in force, which is a macro-control of the state. However, this year, I personally feel that infrastructure should play a supporting role in the overall demand, and there will not be a strong cycle against the trend, because this contradicts the direction in which the country wants to suppress bulk prices. Last year, the National Network invested 450 billion, and this year will not increase much. It is basically a flat state. In addition, the rise in raw material prices will naturally form a natural negative feedback, so the overall prediction of the domestic. In the fourth quarter as a whole is a steady decline in the process.

The period when overseas was particularly affected by the epidemic has now passed, but judging from the current data, overseas demand has not returned to the pre-epidemic level, and full recovery may not be until the first half of next year. So there is still room for overseas demand. From the fourth quarter of this year to the first half of next year, as long as the impact of the epidemic at the end of the year is not too excessive, overseas demand will still have an external support for copper.

If the overall balance of supply and demand this year is in fact a tight balance, the output of 24 million tons of refined copper will meet the demand of 23.9 million tons of refined copper, and there will be a tight balance of excess supply of less than 200000 tons, then the expectation of marginal growth will be very important.

The most important marginal growth this year, and the hottest speculation is the expectation of new energy. There are many things to talk about, including the "Action Plan for carbon Peak before 2030" issued by the state in early November, and some misunderstandings about the replacement of clean energy. This paper only analyzes from the perspective of marginal growth. In fact, last year and this year, the marginal growth of copper in the whole new energy sector is not particularly large. The increase of more than 200,000 tons has a relatively small impact on copper, a variety with a volume of 24 million tons. In the later stage, with the increase of environmental protection pressure in the general direction and the tilt of national policies, such as the increase of sea breeze permeability and the increase of energy storage demand, there was a significant increase in 22 years, and then ushered in a relatively large marginal increase in 2025. So the inflection point of marginal growth will occur next year, and individuals are more likely to appear after the data come out in the first half of the year.

Finally, let's look at the short-term stimulus. The recent energy crisis and environmental protection-related production and electricity restrictions have caused a general rise in commodities. At this stage, the gradual increase in power consumption in all aspects of copper smelting and processing, from upstream to downstream, once suppressed consumption and was also reflected in copper prices. In addition, the recent focus has been the 20-week decline in inventories, which has been driven down this year by outbreaks in Southeast Asia, container shortages and the energy crisis. It also caused the behavior of forcing positions this time. The price difference between LME's copper and CASH in March was more than US $300, and unofficially reported 1000, so this situation is the obvious impact of short-term stimulus on the market.

During this period, both the absolute level of domestic inventory and the absolute level of overseas inventory are at a historically low and low level in the same period. Global inventories have previously dropped to a 30-year low, which will certainly support copper prices in the short term. However, from the point of view of the cancellation of inventory than these data, this trend of destocking is slowly approaching an inflection point in China. It is expected that a stage of accumulation will be gradually formed at the end of the year or even to the first quarter of next year, including the 12000 copper price forecast by Goldman Sachs next year, which also regards the period from the end of the year to the domestic Spring Festival as the stage of stock preparation. In fact, the continuous decline in inventories has been the seasonal transfer stage from LME to Asia, and consumption alone does not match the current inventory data level, so the next inflection point of inventory outside the end of the year is around the Spring Festival, if inventories continue to decline, corresponding to consumption data, copper prices may also usher in a wave of pull-up.

Generally speaking, the macro inflection point, supply and demand inflection point, and inventory inflection point basically fall in the first half of next year, and this can be verified in the future, so what is the most likely situation? after the problem of low inventory alleviated in the first quarter, the lower support gradually weakened, and the support brought by the marginal growth on the demand side in the second quarter was covered by the expected impact of policy tightening on the macro side in the second half of the year, so we still need to be cautious in the future.