SHFE/LME Copper Price Ratio Continued to Improve amid Favourable Policies in China and the Frequent Tightening Cycles Overseas

SHANGHAI, May 5 (SMM) - Last week, the performance of US economic data was complicated. Although the GDP in the first quarter decreased quarter-on-quarter, the rest, such as durable goods orders, consumer confidence index and manufacturing PMI in April, all performed relatively strongly, indicating that the US economy is still recovering. Besides, the US Fed meeting on interest rates will be held this week. There is little suspense about the frequency and intensity of interest rate hikes expected by the market, and the attitude of Fed officials is relatively consistent.

Last week, the US dollar index surged to 103.93, with the largest weekly increase of 3%, putting pressure on base metals prices. In addition, LME inventory continued to increase last week, and LME copper prices plunged 2.5% on Monday April 25, dropping from $10,100/mt to $9,675/mt. LME copper prices dropped nearly 4%, completely falling below all recent daily-moving averages, and losing the momentum above $9,800/mt. The strong performance of the US dollar index last week has basically paid off the interest rate hike expectation. After the meeting on interest rates, the US dollar index will probably be pulled back and give up the gains, supporting LME copper.

In the domestic market, the economic damage and worries aroused by the pandemic caused the commodity market and A-shares to fall continuously. Last week, domestic A-shares fell below 3,000 to 2,863, and industrial products fell by nearly 2%. The most-traded SHFE copper contract plunged 2.2% on Monday April 25, directly falling below the 40-day moving average from around 75,000 yuan/mt. The futures prices dropped to 72,500 yuan/mt, almost pointing to the 60-day moving average.

In addition, the central government held a financial and economic meeting, announcing that in 2022, the country would comprehensively strengthen infrastructure construction, and build a modern infrastructure system to support the economy. What’s more, the country would intensify macro-adjustment to achieve the annual GDP growth target of 5.5%. Boosted by the above actions, the market stabilised at a low level, and A-shares recovered to 3,000. On Friday April 29, the most-traded SHFE copper contract returned to above the 40-day moving average. Before the Labour Day holiday, the shorts chose to decrease their positions and leave the market to mitigate risks, and SHFE copper futures rallied to 73,500 yuan/mt on Friday.

Last week, the SHFE/LME price ratio improved day by day, rising from 7.43 at the beginning of last week to 7.55 last Friday, and the import losses once dropped to less than 100 yuan/mt, which was in line with the expectation and operation of reverse arbitrage speculators before.

The most-traded SHFE 2206 copper contract is expected to trade between 73,000-74,000 yuan/mt, and LME copper will trade between $9,700-10,000/mt.

On the fundamentals, according to the weekly stock report of SHFE, the inventory dropped by more than 21,000 mt last week. It suggests that the signs of consumption recovery are gradually strengthening, especially in May when the pandemic will be further improved and the comprehensive resumption of work can be expected. After the holiday, with the support of the expected improvement in demand and the low inventory, the premiums will likely rise. However, there are only 8 trading days left before the delivery of 2205 in May after the holiday. Last week, the open interests stood at more than 53,800 lots in April, and the warrants were less than 18,000 mt. The reduction of positions before the delivery may again expand the spread between the front-month and next-month contracts to nearly 600 yuan/mt that appeared in April. By then, the spot premiums will gradually drop under pressure. Spot premiums are expected to move between 250-400 yuan/mt this week.

Disclaimer:

The above representation and data is based on market information SMM believes to be reliable at the time of acquiring as well as the comprehensive assessment by SMM research team, and any and all information provided in this article is for reference only. This article does not constitute a direct recommendation for investment or any decisions in any form and clients shall act on their own discreet and any decisions made by clients are not within the responsibility of SMM.