SMM: Post-CNY Copper Cathode Market Supply-Demand Pattern and Price Forecast

SHANGHAI, Jan 27 (SMM) - SMM has done a thorough research regarding post-CNY (Chinese New Year) copper cathode supply and demand pattern as well as the potential changes of inventory, which, we assume, must be the key concern of the market participants. The result of the research comes as follows:

Supply:

Maintenance will not be the key word in February and March. There are four smelters planning to carry output maintenance in late March, which will reduce the output by around 8,000 mt, according to SMM research. In other words, it will have insignificant impact on post-holiday inventory accumulation, and serves as a bullish factor for the whole inventory to drop smoothly. SMM believes that the output in February and March will stand at 850,000 mt and 860,000 mt respectively, up 28,200 mt and down 5,000 mt year-on-year respectively, or a combined increase of 25,200 mt.

As of copper cathode imports, the import volume is expected to fall 20,000-30,000 mt in February and March 2022 year-on-year as the baseline in 2021 was high and the recent SHFE/LME price ratio has not been favourable.

Demand:

The spread between copper cathode and copper scrap is likely to expand post the CNY holiday amid rapidly rising copper prices. Hence the downstream demand for copper cathode will be suppressed, and the relative purchases will drop drastically as well. It can be told from the constantly low post-holiday demand in Guangdong in 2021 compared with the previous years.

Five-day Average Shipments in Guangdong around the CNY Holiday

Looking into 2022, copper prices are more likely to fall instead of rising ahead of the expected interest rate hike of the US Federal Reserve in March. As such, copper scrap will be less favoured by the market as a substitute for copper cathode. Besides, the central government has increased the liquidity at the beginning of 2022 in order to stabilise the economy, and a series of infrastructure construction projects have been initiated for the same purpose. Meanwhile, the short-term export market is expected to maintain the prosperity, and will not see palpable bearish development in the near future. To sum up, SMM believes that the post-holiday demand in China will rally steadily, and the consumption of copper cathode will also outperform the previous year.

Inventory

The copper inventory rose ahead of the CNY holiday in 2022, which is in line with market estimate. The increase in total inventories recorded 12,700 mt, flat from 2021. Nonetheless, though the post-holiday inventory is still likely to rise, the actual increase is estimated to be less than in the same period in 2021 (the high in total inventories usually comes in the 6th week post the CNY), the causes, as is mentioned above, lie in the forecast that the demand will grow more quickly than the supply. As such, the post-holiday inventory is likely to rise by around 10,500 mt, below the level of 11,900 mt seen in 2021, which is also the lowest in the past few years. The inventory changes are as follows:

Price forecast:

The copper prices are more likely to drop after the CNY holiday as the market broadly believes that the US Fed will hike the interest rate in mid-March, according to SMM forecast. However, there is also lower possibility that copper prices will experience drastic falls on the ground of better-than-last-year post-holiday demand as well as the low inventories. The market, though, shall keep an eye on the unexpected liquidity tightening of the Fed. From a technical point of view, the current copper prices are about to walk out the triangle consolidation range. It is expected that there will be a breakthrough in 1 or 2 weeks after the holiday, and the focus is on whether the prices will move upwards or downwards.

If the prices move upwards and break through the resistance, the copper prices are expected to hit a high of 75,400 yuan/mt, or meet support at 66,600 yuan/mt first and then 64,000 yuan/mt the other way round.