Analysis of Supply and Demand of Copper Market after Spring Festival in 2022

SHANGHAI, Feb 17 (SMM) - SMM expects that the overseas copper concentrates expansion projects will accommodate a combined capacity of 1.1 million mt in metal content in 2022. The increase in the supply of copper concentrates still drives the growth of copper cathode production. In 2021, the global copper concentrate was tight due to various disruptions. At present, the balance between supply and demand of spot copper concentrates is inclined towards the smelters. In 2022, the TC of long-term agreement was raised to $65/mt. SMM believes that the global copper concentrates will oversupply in 2022.

2021 Copper Market Review

In 2021, copper prices fluctuated at a high level. The high inflation data caused the market to fall into economic “stagflation”, and the US Fed’s interest rate hike in March was almost determined. The US CPI index exceeded the target set by the US Fed and climbed to a high of 5.4% in July. PPI soared quickly. The pressure of rising upstream prices was constantly passed on to consumers. At the same time, the US ISM manufacturing industry declined at its peak.

In terms of domestic economic highlights, export support gradually faded, while the support of infrastructure strengthened. Since Q4 2020, the pressure of consumption boosted by exports gradually surfaced. The new export orders of domestic manufacturing PMI fell back to the contraction range in May and accelerated downward in the third quarter, indicating that the export support for the economy was weak. In the fourth quarter, the issuance of special bonds was accelerated, and major projects were proceeding quickly, laying out the growth space for infrastructure investment in advance next year. In January 2022, social financing data hit a four-year high for the same period.

Tight copper concentrate tension gradually eased. China's copper consumption had accounted for half of the world, but the GAP between copper cathode supply had not been effectively repaired, so China needed to import a large amount of copper cathode from overseas every year. Over the past decade, China's copper concentrate self-sufficiency continued to decline, so the imbalance between supply and demand gradually deepened. The supply declined from 40% in 2010 to 23.5% in 2021. China needs to import largely overseas copper raw materials to meet domestic copper consumption. In early 2021, due to the tight supply of copper concentrates, SMM spot index of copper concentrates dropped to a historically low level. But the spot TC had risen continually since mid-April, owing to relieved copper mine shipment and gradually released newly expanded capacity. Sulfuric acid prices remained above 1,000 yuan/mt in the south amidst strong downstream demand. TCs of crude copper was 900-1000 yuan/mt higher than the cash cost of the crude copper-copper cathode. The rising of crude copper TCs and sulfuric acid prices in the first half of the year gave smelters “momentum” to a large extent. However, the demand for sulfuric acid weakened significantly since September, and the high price of sulfuric acid fell, with crude copper TCs rising after falling to the lowest level. It was difficult for smelters to gain profits on sulfuric acid in the medium and long term, with TCs and RCs profits accounting for a rebound.

SMM expects that the new expansion of overseas copper concentrates will be 1.1 million mt in metal content in 2022. The increase in the supply of copper concentrates still drives the growth of copper cathode production. In 2021, the global copper concentrate was tight due to disruption. In 2022, the TC of the long-term agreement was raised to $65/mt. SMM believes that the global copper concentrates will oversupply in 2022.

According to SMM, domestic copper cathode output increased by 650,000 mt to 9.95 million mt in 2021, with a growth rate of 7%. Then, the growth rate decreased to about 5% in 2022, which was mainly contributed by Huiying, Yangxin Hongsheng, Zijin and Dongying Fangyuan.

An Overview of Downstream Consumption Recovery after CNY Holiday of 2022

In the early Spring Festival of 2022, the operating rate of copper was at a low level, and the operating rate of copper wire and cable dropped significantly in January, which was less than expected. SMM believed it was mainly affected by the following factors: first of all, consumption weakened seasonally. The production stopped and the demand fell for the cold weather. Secondly, some wire and cable companies stopped production in early January. Besides, fewer workers stayed in the local for CNY holidays due to the pandemic. And lots of companies had early holidays for the Spring Festival but a late resumption of production compared with previous years. Finally, the prices of nonferrous metals and steel were still relatively high, and the end-user industries were not enthusiastic about winter storage.

The realised investment of the State Grid in 2021 was 495.1 billion yuan, an increase of 5.4% YoY, but the delivery of copper to the State Grid in 2021 posted no highlights. In 2022, the planned investment of State Grid increased by 1.2%, but the copper consumption was not optimistic owing to the increased raw material prices. During the “14th Five-Year Plan” period, investment in the State Grid will be nearly 3 trillion yuan. Although the investment is significantly higher than 2.57 trillion yuan and 2 trillion yuan during the “13th Five-Year Plan” and “12th Five-Year Plan” periods respectively and is 17% higher than its total investment during the “13th Five-Year Plan”. However, attention should be paid to the investment direction and unit consumption pressure brought by the increase in material prices.

At this point, the support of end consumption was deteriorating. In May, new construction and completion of real estate will cool down. Under the strict control of housing speculation, real estate could hardly support copper consumption in the long term. The pressure of consumption boosted by exports gradually showed since Q4 2020. In addition, the lack of chips will also affect car production. And the actual consumption is also worth worrying.

The low-level operation of inventories effectively supported the backwardation and high premiums structure. However, some of this was due to the shortage of logistics and the delay in resuming work at the downstream. As a result, the inventories after the Spring Festival exceeded the corresponding period of previous years.

After the holiday, LME Copper kept destocking but still faced the risk of a squeeze. In the short term, LME copper will hardly increase along with domestic and foreign fundamentals.

Copper Market Forecast for 2022

SMM believes that there will be a crisis in monetary liquidity and a slight surplus in fundamental supply, so the copper prices range will be 61,000-73,000 yuan/mt in 2022.