COMEX copper short squeeze risk remains, COMEX, LME and SHFE copper all hit historical highs [SMM News]

Multiple departments, including the PBOC, have launched a series of policy support in the real estate market. The NDRC will take more measures to consolidate and expand the development advantages of the NEVs industry. Market expectations for a rate cut by the US Fed within the year have resurfaced. Multiple favourable macro fronts and market concerns about geopolitical risks have led to significant increases in copper, gold, and silver. Together with market expectations that the COMEX copper short squeeze risk remains. COMEX copper, LME copper, and SHFE copper have all hit historical highs since their launches. As of 11:09 on May 20, COMEX copper was at $5.1585/oz, up 2.15, hitting a new high of $5.199/oz during the session. LME copper also hit a record high during the session on the 20th, reporting $10,976.5/mt, up 2.89%, with a new historical high of $11,104.5/mt. SHFE copper rose 5.08%, reporting 87,250 yuan/mt, hitting a new high of 88,940 yuan/mt since its launch in 1995.

News

[NDRC: More measures to consolidate and expand the development advantages of the NEVs industry] NDRC Deputy Director of the Industry Department, Huo Fupeng, said that the NDRC will work with relevant parties to take more practical measures to improve quality, reduce costs, and expand the volume of NEVs, consolidating and expanding the industry's development advantages. Huo Fupeng said that in terms of encouraging NEV consumption, the next step is to promote the implementation of policies such as replacing old cars with new ones, promoting NEVs in rural areas, and electrifying public sector vehicles to further expand the market scale. In accelerating technological progress and innovation, support will be given to relevant enterprises to speed up the R&D of electrification and intelligent technologies, strengthening strengths and addressing weaknesses to continuously enhance industrial competitiveness.

The Financial Times, managed by the PBOC, published an article analyzing that from the perspective of promoting the market-oriented mortgage rates, the current time window is quite favorable. The trend of economic recovery is strengthening, and there is a deeper understanding of the significant changes in the supply and demand relationship in the real estate market. Further optimization of relevant policies is in line with the trend.

[First weekend after the "May 17" real estate new policy, Beijing's average daily second-hand home transactions exceeded 1,000 units] According to data from Centaline Property, during the first weekend after the " May 17" real estate new policy (May 18-19), Beijing's average daily second-hand home transactions exceeded 1,000 units again, with over 900 units on May 18 and over 1,100 units on May 19, totaling over 2,000 units for the weekend, reaching the heat of the small spring in 2024. Additionally, some new home projects also saw a warming trend in transactions. (Cailianshe)

[PBOC's measures boost the real estate market, Shenzhen's largest local agency's second-hand home transactions rose by 117%] During the first weekend after the central bank's favourable policies (May 18-19), the second-hand home viewing volume at Shenzhen's largest local agency, Le You Jia, increased by 127% compared to previous weekends, reaching the highest point since 2018, surpassing the historical peak in Q2 2020. The second-hand home transaction volume at the agency's Shenzhen stores increased by 117% compared to previous weekends, with the single-day transaction volume on May 19 reaching the highest point since February 2021. (Cailianshe)

[PBOC to establish 300 billion yuan affordable housing re-loan] At the State Council's regular policy briefing held by the State Council Information Office on the afternoon of May 17, Deputy Governor of the People's Bank of China, Tao Ling, stated that the central bank will establish a 300 billion yuan affordable housing re-loan to encourage and guide financial institutions to support local state-owned enterprises in purchasing completed but unsold commercial housing at reasonable prices for use as affordable housing. The re-loan scale is 300 billion yuan, with an interest rate of 1.75%, a term of 1 year, and can be extended 4 times. The 21 national banks recipients include the China Development Bank, policy banks, state-owned commercial banks, Postal Savings Bank of China, joint-stock commercial banks. Banks can issue loans to local state-owned enterprises selected by city governments to purchase completed but unsold commercial housing for use as affordable housing, following the principles of independent decision-making and risk-bearing. The central bank will issue re-loans at 60% of the loan principal, which can drive bank loans of 500 billion yuan. Vice Minister of Housing and Urban-Rural Development, Dong Jianguo, stated at the briefing that city governments adhere to the principle of "purchasing according to demand" and can organize local state-owned enterprises to purchase some existing commercial housing at reasonable prices for use as affordable housing. Properly handle and activate existing land. For existing land that has not yet been developed or has been started but not completed, it can be properly handled and activated through government recovery and purchase, market circulation transfer, or continued development by enterprises, promoting real estate companies to alleviate difficulties and reduce debt, and promoting the efficient use of land resources.

[Three major measures launched! Significant real estate measures introduced, involving down payments, loan rates, etc.] At noon on May 17, the real estate market welcomed multiple significant benefits. The central bank and other departments issued three notices, adjusting policies on provident fund loan rates, commercial loan rate policy lower limits, and down payment ratios for home purchases. The People's Bank of China issued a notice on lowering the personal housing provident fund loan rate, effective from May 18, 2024, lowering the personal housing provident fund loan rate by 0.25 percentage point. The rates for first-time personal housing provident fund loans for terms of 5 years or less (including 5 years) and more than 5 years are adjusted to 2.35% and 2.85%, respectively. The rates for second-time personal housing provident fund loans for terms of 5 years or less (including 5 years) and more than 5 years are adjusted to no less than 2.775% and 3.325%, respectively. On the same day, the People's Bank of China issued a notice on adjusting the commercial personal housing loan rate policy, mentioning the cancellation of the national lower limit for the commercial personal housing loan rates for first-time and second-time home purchases. The People's Bank of China and the National Financial Supervision and Administration also issued a notice on the same day. The notice stated that for residents purchasing commercial housing with loans, the minimum down payment ratio for first-time home purchases is adjusted to no less than 15%, and the minimum down payment ratio for second-time home purchases is adjusted to no less than 25%. Click to view details

[NBS: Industrial output above designated size increased by 6.7% YoY in April, national economy continues to rebound positively] According to NBS data, in April, the industrial output above designated size increased by 6.7% YoY. On a MoM basis, the industrial output above designated size increased by 0.97% in April. From January to April, the industrial output above designated size increased by 6.3% YoY. By the three major sectors, in April, the value-added of the mining industry increased by 2.0% YoY, manufacturing increased by 7.5%, and the production and supply of electricity, heat, gas, and water increased by 5.8%.

[US core CPI falls to nearly three-year low, market expectations for US Fed rate cut within the year increase] Before the market opened on Wednesday local time, the US Department of Labor disclosed the April Consumer Price Index (CPI), with the nominal CPI annual rate at 3.4%, in line with expectations; the monthly CPI increased by 0.3%, slightly lower than the expected 0.4%; the more critical core CPI annual rate further fell to 3.6%, in line with expectations, reaching the lowest point since April 2021. Market expectations for a US Fed rate cut increased. Based on the confidence brought by the CPI data, the probability of the US Fed making the first rate cut in September, as predicted by the swap market, also exceeded 70%, and the probability of two rate cuts before the end of the year also exceeded 50%. Click to view details

[JPMorgan: BHP needs to spend $50 billion to successfully acquire Anglo American] JPMorgan analysts released a report stating that BHP needs to increase its latest offer by about 30% to fairly reflect the value of the British mining company Anglo American, in other words, BHP needs to spend $50 billion to successfully acquire Anglo American. BHP previously launched a bid for Anglo American, but both offers were rejected. The company's offers were £25.08 per share (total value of £31.1 billion, equivalent to $39.1 billion) and £27.53 per share (total value of £34 billion, equivalent to $42.7 billion). Anglo American claimed that the latest offer still significantly underestimated its value. JPMorgan analysts said that after reassessing the value of Anglo American's copper assets, they raised the company's target price to £27.75 per share. They also stated that Anglo American's current stock price has a discount of up to 13.6% compared to the implied value of BHP's offer, indicating that the market believes the likelihood of BHP's successful acquisition is very low. According to JPMorgan's estimates, the reasonable acquisition price for Anglo American is £32 per share, with a total value of approximately £39.5 billion (equivalent to $50 billion).

[Chilean Copper Commission raises copper price forecasts for 2024 and 2025] The Chilean Copper Commission (Cochilco) raised its average copper price forecasts for this year and next year on Thursday. The Chilean Copper Commission currently expects the average copper price this year to be $4.30 per pound, higher than the previous forecast of $3.85. For 2025, the average copper price is expected to be $4.25 per pound, higher than the previous forecast of $3.90. The Chilean Copper Commission predicts that this year's copper supply will be short by 364,000 mt, and by 278,000 mt in 2025.

Spot Market

As copper futures on the three major exchanges hit record highs, downstream copper demand was inhibited.

In the spot market, on the 20th, due to significant copper price fluctuations, market transactions weakened noticeably. Sellers, pressured by their positions, were more willing to sell, leading to a sharp decline in spot premiums. In the early morning session, mainstream standard-quality copper was quoted at a discount of 290-280 yuan/mt; high-quality copper like CCC-P and Jinchuan large plates were quoted at a discount of 280-260 yuan/mt. During the main trading session, the focus of the discount quotations shifted downward. Mainstream standard-quality copper was quoted at a discount of 300-290 yuan/mt with some transactions, while high-quality copper like CCC-P and Jinchuan large plates were quoted at a discount of 290-280 yuan/mt with some transactions. Downstream immediate pricing transactions had strong bargaining power, with transactions at a discount of 350-330 yuan/mt. By 11 a.m., the transaction prices for standard-quality copper and high-quality copper slightly declined, with mainstream standard-quality copper quoted at a discount of 330-320 yuan/mt with some transactions, and high-quality copper quoted at a discount of 310-300 yuan/mt with some transactions. On the 20th, the market experienced extreme conditions, with copper prices surging significantly, leading to a noticeable setback in downstream demand and limited consumption growth. Sellers quoted historically high discounts for the current month contract. It is expected that spot premiums will continue to expand on May 21.

For Spot copper in South China, according to an SMM survey, Guangdong inventory has declined for four consecutive days, mainly due to limited arrivals. Despite the continuous decline in inventory, downstream manufacturers were in a wait-and-see mode due to copper prices hitting record highs, unwilling to purchase more. Sellers had to continuously lower premiums to achieve a small number of transactions. As of 11 a.m., high-quality copper for the current month contract was quoted at a discount of 340 yuan/mt, standard-quality copper at a discount of 400 yuan/mt, and hydro copper at a discount of 460 yuan/mt. Attention should continue to be paid to the impact of warehouse receipt outflows on the spot market. Currently, Guangdong warehouse receipt volume is 38,287 mt, down 1,665 mt from the previous day. Overall, with copper prices hitting record highs, spot trades were bleak, and premiums continued to decline.

Inventory

As of Monday, May 20, SMM copper inventory across major domestic markets decreased by 7,600 mt from last Thursday to 402,800 mt, falling from the year's high. Compared to last Thursday, inventories in most regions across the country decreased, with only Jiangsu region increasing. Total inventory was 280,100 mt higher YoY (122,700 mt). Specifically, Shanghai inventory decreased by 1,800 mt from last Thursday to 276,900 mt, as poor SHFE/LME price ratios led to a decline in imported copper arrivals. Jiangsu inventory slightly increased by 100 mt from last Thursday to 53,400 mt, as high copper prices weakened downstream consumption, but arrivals were still limited, so inventory changes were minimal. Guangdong inventory decreased by 2,800 mt to 50,500 mt, with reduced arrivals and low outflows, as reflected by the low average daily outflows in Guangdong.

Smelters will continue to increase exports, with smelter maintenance activities. Additionally, according to SMM, this week's import arrivals are also limited, so total domestic supply is expected to decrease. On the downstream consumption side, with copper prices hitting record highs, downstream wait-and-see sentiment is strong, and procurement is generally weak. Therefore, SMM expects a weak supply and demand situation this week, with a slight decline in weekly inventory.

Market Outlook

Currently, copper prices are buoyed by optimistic sentiment from favorable macro factors. For the copper market outlook, caution is needed for the risk of a price correction after breaking previous highs and the gradual dissipation of macro trading sentiment, leading to profit-taking by some funds. On the demand side, high copper prices inhibited the procurement demand of downstream processing enterprises, and market activity remained low. After the release of warehouse receipts, spot supply will be more ample, and SMM expects continued pressure on premiums and discounts. On the macro front, attention should be paid to whether there will be more favorable policies for the automotive and real estate sectors in China, as well as US employment data and the US Fed's monetary policy meeting minutes, which could impact Fed rate policy. Additionally, the risk of escalating geopolitical conflicts should be monitored.

Voices from Various Sides

[Former Goldman Sachs Commodity Chief: Buy Copper Now, It's the "Best Trade" Right Now!] Jeff Currie, former head of commodity research at Goldman Sachs and chief strategist for the energy pathway at Carlyle Group LP, recently stated that tight copper supply will significantly drive up its price, and he is very optimistic about this opportunity. Currie expects copper prices to reach $15,000 per ton in the coming years.

A research report from Citigroup stated that copper futures on COMEX and the London Metal Exchange (LME) have attracted up to $25 billion (approximately 180 billion yuan) in speculative long funds.

A research report from Dongwu Futures pointed out that on the macro front, overseas rate cut expectations are heating up, together with multiple favorable policies in the domestic real estate sector, raising market risk appetite. On the fundamentals, the tight supply of copper concentrate has not been effectively alleviated, and the scale of production cuts in May is expected to further expand, while downstream demand remains resilient, providing support for the fundamentals under passive restocking, keeping copper prices strong.

A research report from Everbright Futures pointed out that under the backdrop of massive medium and long-term bond issuance in the US, boosted rate cut expectations, and continuous domestic steady growth measures, the macro environment maintains an optimistic market atmosphere and risk appetite. With ample liquidity, copper prices also remain strong. Additionally, the COMEX copper short squeeze event has attracted significant funds into both domestic and international copper markets this year. However, COMEX mainly targets the North American market, so demand and inventory levels are relatively low. When the inventory-to-open interest ratio quickly drops to historically low levels, it is eventually utilized by longs. The COMEX event highlighted the tight copper inventory situation, and resolving the crisis involves reallocating copper that can be delivered on COMEX from China and LME warehouses, which takes time. Currently, COMEX copper open interest remains high, so the event may continue to ferment, further boosting market sentiment. In the short term, without seeing key turning point events, the direction may still be upward, but the divergence between expectations and reality is growing, with both opportunities and risks in going long, so position control is advised.

A research report from China Futures pointed out that the macro environment is generally bullish both domestically and internationally, with macro funds leading the way. In the short term, copper prices are expected to remain strong. Currently, SHFE copper has reached historical highs, and COMEX copper also has some long positions taking profits locally. Combined with the cooling trend in current overseas economic data, a cautiously optimistic view on copper price peaks is advised. Additionally, the trading risk in overseas markets can only mobilize the flow of goods, potentially alleviating China's inventory pressure in the next month, but the global inventory accumulation pressure may still be difficult to ease.