Low Inventories Will Support Copper Prices Amid Diverging Macro Signals in China and Overseas

SHANGHAI, Feb 9 - The average daily spot price of SMM1# copper was 71,070 yuan/mt on the first day after the Spring Festival, an increase of 570 yuan/mt from January 28, and the closing price of SHFE copper was 70,430 yuan/mt, an increase of 140 yuan/mt.

Macro overview: Divergence of liquidity performance at home and abroad (1) The non-farm payrolls data in the United States performed well. US nonfarm payrolls increased by 467,000 in January, the largest increase since October last year, significantly higher than market expectations of 150,000. Brent oil prices continued to rise and exceeded $93 per barrel, the highest since 2014. In the context of the continuous improvement of employment data and high inflation pressure, the market believes that the Fed's interest rate hike in March may be a certainty. According to FedWatch data, as of February 7, the market expected that the probability of a 50 basis point increase in the interest rate by the FOMC in its March meeting had risen to 31.8%, up from 18.2% a week earlier. The US 10-year Treasury yields also rose sharply, approaching 2%, the highest since 2020. (2) On February 3, the Bank of England raised the benchmark interest rate by 25 basis points to 0.5%. The European Central Bank and the Reserve Bank of Australia kept interest rates unchanged, but both will halt their bond-buying programs.

In China, the policy to promote steady economic growth has brought little effect due to the impact of the off-season and pandemic. The recovery of the real economy under the trend of monetary easing policy may be realized in the second quarter. Due to the continuous downturn of the real estate industry as a whole, after the Central Economic Work Conference set the tone of "steady growth", the monetary policy has been loosened further. The recent reduction in MLF and 5-year LPR will help stimulate residents' expectations for home purchases and boost the real estate market. In addition, the issuance of special local government bonds continued to pick up, which will boost infrastructure construction in the first half of the year. Appropriate expansion of domestic liquidity will boost expectations for a recovery in demand for commodities. 

Fundamentals overview: Low inventory will provide strong support for copper prices. From the perspective of domestic supply and demand, copper supply remains high, while domestic consumption is seasonally weak. Copper inventory began to accumulate during the Spring Festival, but the growth was smaller less than expected. As of February 7, SMM copper inventory for mainstream markets in China was 157,500 mt, a year-on-year decrease of 13.4% and the lowest level in four years. LME copper inventory fell to 80,000 mt, and the global visible inventory is still at a low level. Overall, there is still strong support for copper prices under the global low inventory.

Copper is also one of the most favoured asset allocations under high inflation, but the expectations of tightening liquidity overseas will put downward pressure on copper prices. Given the positive and negative factors, copper prices are unlikely to break out of the current moving range.