SHANGHAI, Jun 28 (SMM) - As June is counting down, the first half of 2022 is also coming to an end. Since March, China was hit by the extensive COVID outbreak, during which time Shanghai was locked down for two months, resulting in a historical low in the copper processing industry with east China market hit the most. Now let us review the performance of the copper rod industry in the first half of the year.

Operating rates of copper cathode rod recorded multi-year low

The operating rates in the copper cathode rod industry was at its multi-year low in the first half of 2022, and recorded a new low at the same period of the year since 2016 in the second quarter. And the causes vary.

① Due to the Chinese New Year holiday in January, the downstream enamelled wire and cable industry was closed earlier for holiday than in previous years. And the copper rod enterprises were also about the close the year. In addition, sporadic COVID cases were found Tianjin, Henan, Zhejiang and other areas in January, directly restricting copper rod shipment, and the operating rates dropped significantly.

② After the Chinese New Year, high copper prices have put the downstream into a wait-and-see position, while the terminal real estate, infrastructure and other projects were late in resuming the production, and the orders from enamelled wire industry were also far less than in the same period in previous years. As such, the demand for copper rods contracted significantly.

③ Since mid-March, the pandemic emerged in a number of cities in south and east China, including Shenzhen and Dongguan in south China and Changzhou, Shanghai and Wuxi in east China, casting a direct impact on the copper rod industry. After the Qingming Festival, Shanghai unexpectedly launched a two-month-long COVID lockdown, hindering the circulation of copper cathode. In April, many copper rod enterprises in Jiangsu and Zhejiang provinces, due to the shortage of raw materials, reduced the production, pulling down the average operating rate to 54.68%, a record low for the same period in the year since 2016.

④ With the improvement of the pandemic situation in May, logistics in east China gradually recovered, and copper rod enterprises also gradually resumed normal production. But the damages to the consumption were lasting. For example, the traditional infrastructure, real estate sectors recovered slowly, while the terminal home appliances sector saw contracting consumption. Hence the operating rates in May were lower than in previous year despite rallies month-on-month.

Overall, the consumption was seriously hurt by the pandemic outbreak in China in the first half of 2022. Although the copper prices fell sharply in the second half of June, it fails to shore up the demand side immediately. As such, the overall operating rates in the copper cathode rod industry were lower than in previous years.

Secondary copper rod sector was also less satisfying due to new VAT policy and inverted price difference between copper cathode and scrap

At the end of 2011, the Ministry of Finance issued the Announcement on Improving the VAT Policy on Comprehensive Utilisation of Resources (Announcement No. 40 of 2021 by the General Administration of Taxation of the Ministry of Finance, hereinafter referred to as Caishui No. 40) and will be implemented starting from March 2022. The news was followed by a fierce reaction from the secondary copper industry, with enterprises' procurement and production affected to a certain extent. After the policy was launched in March, if the secondary copper rod enterprises want to obtain the 30% VAT refund, they must purchase copper scrap with invoices. However, the supply of sources with invoices in the market was limited, while the demand for copper scrap with invoices surged under the new policy. Therefore, supplies of copper scrap with 13% VAT invoice were quite sought-after, restricting the procurement of raw materials, which later led to production suspensions voluntarily or passively.

According to SMM, recycled copper rod enterprises, in order to reduce costs when obtaining tax rebates, first sourced copper scrap without invoices through the establishment of recycling companies, and then sell copper scrap with 3% invoice to their own processing plants. Although it has made the procurement process more complicated, it has effectively addressed the issue of invoice, which is also compliant with Caishui No. 40. However, the total cost of these scrap users is still higher than before when the policy has not been introduced, so the profitability of the secondary copper rod industry has become more fragile.

On the other hand, copper prices have fallen sharply since mid-June, while secondary copper prices fell less significantly as goods holders were less willing to sell. In this case, the spread between copper cathode and scrap fell to the negative territory, supressing the consumption of copper scrap. Meanwhile, secondary copper rod enterprises were challenged by high raw material prices and poor sales pressure, and some had to reduce or even suspend the production due to losses.

Overall, secondary copper rod and copper cathode rod could substitute each other. Therefore, the operating rates of secondary copper rod have been greatly contained by poor demand amid CVOID breakout, higher difficulties in purchasing copper scrap due to Caishui No. 40, as well as inverted price difference between copper cathode and scrap after copper prices fell steeply.

Contracting demand drags on copper consumption

Power industry, as the traditional consumer of copper, saw rapid growth of power grid investment with support of special local bonds dedicated to infrastructure at the beginning of the year. According to China Electricity Council, the cumulative amount of investment in power grid projects completed in January-March stood at 62.1 billion yuan, an increase of 15.1% YoY. But since April, the growth rate showed a significant slowdown. In the first half of the year, the COVID-19 pandemic recurred across the country, and some of the projects led by the State Grid delayed their construction. In addition, power grid-related bidding projects also dropped significantly. As of May, the cumulative amount of power grid engineering investment completed added only 3.1% year-on-year. Under the targets of carbon peaking and neutrality during the "14^th Five-Year Plan", the power supply structure will accelerate the transition to clean and low-carbon, and the proportion of investment in traditional infrastructure areas is difficult to see a large increase, and relative copper consumption is bound to be reduced.

Real estate industry climate index continues to contract. Based on data released by the National Bureau of Statistics, in the first five months of 2022, the year-to-date real estate development investment has recorded two negative YoY growth in five, and even set a record low since April 2020. The floor areas of new housing starts and completions have been falling for several months on a year-on-year basis. A sluggish real estate market also suppresses the consumption of copper.

In the first half of the year, the home appliance industry also underperformed, dragging on by the gloomy real estate. In the second quarter, consumer confidence dropped in light of spreading COVID across the country, resulting in a serious lack of domestic market demand. On the other hand, with the relief of the pandemic situation overseas, many terminal orders were re-directed to Southeast Asia. Due to factors like rising cost, logistics shortages, heightening shipping costs, the home appliance export market also "cooled". As domestic demand and export orders weakened simultaneously in the first half of the year, the year-to-date growth (YoY) in the output of various home appliances has been caught in the negative territory, with air conditioning industry recording the largest decline of -31.9%.

Real estate and infrastructure sectors are still expectable

With the strong tightening of the Federal Reserve monetary policy, the market fears that the economy will fall into recession, and copper prices fall amid pressure from macro aspects. Copper prices fell sharply in mid-June, a time when the downstream restocking demand has been strong. Coupled with the narrowing of copper cathode and scrap spread, the orders for copper cathode rod surged. Though the terminal demand has not yet fully recovered, and the resilience of consumption needs to be further verified, SMM believes that the overall consumption in the second half of the year will obviously outperform the first half.

In the first half of the year, many central ministries and commissions released to a series speeches and policies aiming that stabilising economic development, including loosening real estate regulation, financial support for real estate developers, risk mitigation measures. All of these measures are expected to revive the real estate market, which will greatly boom the demand for copper. Though the recovery process will take time, it is still expectable.

As of June, the local government has disclosed the planned issuance of new special bonds in June totalling 580 billion yuan, and 72% of annual issuance target has been completed, the highest level in the past six years. In light of the economic downward pressure, infrastructure investment is increasingly important to "stabilise the economic growth". Taking into account the time lag from the issuance of debt to the completion of spending of about 1 month time for government-led infrastructure projects, the wire and cable, enamelled wire and other deep processing material sectors will see the demand rebound in 2-6 months. In other words, the second half of the year will enable the palpable copper consumption increment. At the same time, the new infrastructure projects are more resilient, including digital economy and new infrastructure construction, which will ensure the steady growth of copper consumption.