SHANGHAI, May 12(SMM) - The spot premiums and price spread between the SHFE front-month and next-month contracts moved in fluctuations in the spot market of east China before the delivery. The Backwardation structure of price spread between the SHFE front-month and next-month contracts once surged to 650 yuan/mt before falling back to around 300-350 yuan/mt, and the premium/discount also turned from the discounts to premiums of more than 100 yuan/mt. The main reason was still because the market was optimistic about the front-month contract under the low domestic inventory. While the number of SHFE warrants was limited, resulting in the continuation of the arbitrage opportunity for SHFE.
On the supply side, domestic smelters were in intensive maintenance in April and May. Enterprises like Zhongjin and Fuye delayed the maintenance, while some enterprises started maintenance in May, including Southeast Copper, Chifeng Yuncong, Tongling Jinguan, Daye Nonferrous Metals and Zijin Copper. The output of domestic copper cathode may hit a low within 22 years in May. The output may rebound after the resumption of production at Fangyuan Phase I and Xiangguang in June. At the same time, although the copper import window opened, the spot did not see a significant increase in imported copper. Affected by the pandemic in Shanghai, the overall declaration of imports has still not fully recovered. The domestic supply remained weak, which may change in mid to late June.
On the demand side, the pandemic made an impact on the dismantling of copper scrap and the raw material procurement at some scrap-using enterprises, resulting in a shortage of raw materials in the market. Some copper scrap rod enterprises reduced or suspended production in the case of raw material procurement difficulties and profit spread, which was favourable to copper cathode consumption to a certain extent. At the same time, easing domestic policies have been implemented. Shanghai introduced two batches of white-listed enterprises for resumption of work and the first batch of express enterprises to resume work. It is reported that junior and senior students will be back to school in late May(lockdown may be lifted by then). According to SMM research, the suppression of the pandemic on demand has improved, but the terminal consumption was still poor. The outdoor construction of construction market and power grid suspended and the demand for cable dropped, lowering the orders in copper rod enterprises. The domestic demand is expected to rise after June.
In summary, the domestic inventory will remain low in the short term. Although the Backwardation structure between the SHFE 2206 and 2207 copper contracts stood at 30 yuan/mt but it may expand after the shift of SHFE contract and the arbitrage opportunity is still worthy of attention.
