SHANGHAI, Jan 18 — In the past two weeks, LME copper prices rebounded and hit a 7-month high of $9,250/mt, while the growth in positions of SHFE copper was far slower, with the SHFE/LME copper price ratio falling to around 7.55. Import losses of SHFE near-month contracts stood at 1,400 yuan/mt at one point. Why did LME copper outperform SHFE copper?
China’s Covid cases surged after its scrapping of zero-Covid policy in the second half of December. This took a toll on the copper industry chain, with new order index falling sharply. Some small and medium-sized processing enterprises were forced to shut down amid cash flow issues. Some large enterprises with relatively strong resilience cut output ahead of Chinese New Year holidays against falling new orders and high finished product inventories.
In January, the copper end-user PMI fell off a cliff. The operating rate of copper semis plants in January was 48.47%, down 17.06 percentage points month-on-month, and down13.46 percentage points year-on-year. According to SMM, the entire copper industry chain closed for CNY holidays 4-6 days earlier than the same period of last year.
SMM predicts that the rapid decline in downstream demand will result in more significant copper stock accumulation compared with the same period.
SMM data shows that as of January 16, copper stocks in mainstream markets increased by 18,700 mt to 154,200 mt from January 13, and total stocks increased by 63,800 mt from 90,400 mt in the same period last year (the week before the CNY holidays on January 24). The backwardation structure on SHFE near-month copper contracts turned into a contango structure.
Visible inventories on LME and COMX diverged from those on the SHFE, with overseas inventories on the decline and domestic inventories accumulating. The days of global visible inventories remained low.
The macroeconomic front is expected to be benign in the medium and long-term on the back of favourable domestic policies and slower interest rate hikes overseas. Overseas traders have begun to trade expectations of stronger Chinese demand as a big copper consumer. Low visible inventories also pushed LME copper prices higher.
After CNY holidays, most domestic smelters would remain enthusiastic in production amidst high profits, while demand may hardly see a significant improvement in the short term. However, the export volume of domestic mainstream smelters will increase significantly in February on the back of export profits. The inventory accumulation rate will be reduced.
Nonetheless, SHFE copper prices will lack upward momentum and continue to underperform LME copper. As the U.S. interest rate rose to a high level after March, the suppression of global demand will exacerbate, weakening copper prices. In the first quarter, copper prices will rise before falling.
