Upside Room of Copper Prices to be Limited, with Eyes on Domestic Consumption

SHANGHAI, Jun 14 (SMM) - The US Federal Reserve has reached a consensus on raising interest rates by 50 basis points each in June and July, but is divided over the path of interest rate hikes after September. As US President Joe Biden and US Treasury Secretary Janet Yellen reiterated the necessity to combat inflation and as the non-farm payrolls beat expectations in May, the market was concerned that the pace of interest rate hike will accelerate. Many US Fed officials supported a rapid rate hike to a neutral level, revising the previous statement that interest rate hikes should be suspended in September. Meanwhile, the European Central Bank announced that it will raising interest rates from the beginning of July. These events pushed the US dollar index up from around 102 to 103.37, weighing on base metals prices. At a meeting on May 25, China’s State Council deployed a package of measures to stabilise the economy and guided financial institutions to issue more loans and to reduce financing costs. China’s Ministry of Finance has ensured that the issuance of new special bonds will be basically completed by the end of June, and will strive to have these bonds used up by the end of August, which will play a role in boosting the infrastructure, automobile and home appliance industries. The prices of industrial metals found support from these stimulus policies.

In terms of fundamentals, the output of copper cathode will increase along with the resumption of production of two smelters in Shandong. The Daye project, which was originally planned to be put into production in mid-June, will postpone the plan to mid-August at the earliest for equipment reasons. The expansion projects of Fuye Group and Tongling Non-ferrous are also expected to be put into operation in July-August. The domestic copper cathode output is estimated to remain around 900,000 mt per month in the second half of the year. LME copper inventory dropped 20,200 mt on June 7, the largest single-day decline since 2011, with a daily decrease of 14.33%. LME copper inventory at its Asian warehouses decreased by 16,750 mt in a single day, of which the Busan warehouse saw a drop of 13,750 mt and the Kaohsiung warehouse in Taiwan recorded a decline of 3,000 mt. The market shall closely watch whether the cancelled warrants from the LME Asian warehouses will flow into China. The domestic copper inventories are likely to enter the accumulation cycle in July-August. On the demand side, domestic enterprises accelerated their resumption of production. The backlog orders of major copper wire and cable companies have been released, and demand will be relatively weak in the future. The construction of power grid projects boosted the demand for wire and cable, but the real estate industry is still sluggish. In the current process of production resumption, copper tube, plate/sheet and strip companies are actively replenishing raw materials. SMM will keep a close eye on the recovery of the infrastructure and real estate industries.

Although copper prices are still in an upward trajectory under the support of domestic economic stimulus policies, its upside room many be constrained by the bearish macro front. The US manufacturing PMI in April was significantly lower than expected. The consumption in Europe and the United States has entered a downward cycle. Europe and the United States have tightened their monetary policies rapidly. China’s manufacturing PMI in May saw only a mild rebound. The backlog orders and new orders both fell short of expectations.

SMM sees the most-traded SHFE copper contract between 71,000-73,200 yuan/mt in June and LME copper between $9,200-9,800/mt.