The Back structure is difficult to sustain[SMM Analysis]

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SMM believes that the Backwardation structure of SHFE will weaken in the later market. The premise of the following discussion is based on the existing U.S. tariff level.

First, on the supply side, the interference rate of domestic refined copper supply is lower than expected, domestic production remains high, and the marginal improvement of imported scrap copper combined with the inventory adjustment of large imported copper cathode users are increasing the expectation of SHFE inventory accumulation, weakening the Backwardation structure:

1. SMM expects China's annual copper cathode output to be 12.57 million tons in 2025. The output from January to June 2025 is expected to be 6.5946 million tons, and the output in the second half of the year is still about 6 million tons. The possibility of domestic electrolytic copper production reduction is low. As it coincides with the final year of the 14th Five-Year Plan, Chinese copper smelters have more motivation to ensure the production level of electrolytic copper.
2. Since May, the quantity of scrap copper imported by China has continued to increase, greatly supplementing the raw material sources of copper cathode. Starting from the end of last year, constrained by the market's pessimistic expectations on the U.S. new government's tariff policy, scrap copper traders have long begun to reduce the quantity of scrap copper imported from the U.S. Previously, foreign media reported that U.S. scrap copper inventories were high. Regardless of whether the quantity is accurate, this can indirectly indicate that the U.S. domestic market cannot digest its own scrap copper supply. On the one hand, the marginal decrease in U.S. imports of scrap copper from Canada and Mexico has led to Canada and Mexico having to find alternative outlets for their scrap copper exports, with Asian countries represented by China becoming the primary choice for North American scrap copper exports. On the other hand, U.S. exports of scrap copper to Honduras, the Dominican Republic, Thailand, and Pakistan have increased. These countries process the scrap copper and then transship it to China, so China's imports of scrap copper from these countries are marginally increasing.
3. Recently, foreign media reported that Glencore has been purchasing Russian copper on the LME and plans to ship it to China. According to LME data, in the past few trading days, the LME Rotterdam delivery warehouse received approximately 15,000 tons of delivery requests for Russian copper. This move will exacerbate the further depletion of LME inventories, continue to deepen the LME Back structure, and inevitably weaken the SHFE Back structure.

Second, on the demand side, the high copper consumption is difficult to sustain, and the subsequent landing of U.S. tariff policies, which will lead to the return of the global copper cathode logistics pattern, both indicate the evolution toward a weak Back structure.

1. The front-loading of copper consumption in the first half of this year has overdrawn demand for the second half, making it difficult for copper demand to show another outstanding performance in the second half. In the first half of this year, factors such as the record-high investment of the two networks, the strong promotion of the photovoltaic "rush installation tide", the arrival of the traditional copper consumption peak season, the increase in refined copper demand due to the shortage of scrap copper supply, and the 90-day export rush caused by the U.S. suspension of the 24% tariffs on China all worked together from January to April. However, the good times did not last long, and such considerable demand cannot be replicated in the second half of the year. Copper consumption in the second half of the year is like a crossbow at the end of its flight, making it difficult to have new highlights.
2. Since the end of last year, the global copper cathode logistics flow has shifted with the erratic U.S. tariff expectations. Correspondingly, the pending U.S. tariff policy has directly led to an excessively large LME-COMEX price spread. As a result, the U.S. has absorbed a large amount of copper cathode from South America, China, Africa, and Europe, indirectly causing local supply gaps in Asia. For example, Southeast Asian countries have turned to seeking copper cathode supplies from China, Japan, and other countries to make up for their domestic shortages, leading to the surge in copper cathode premiums in Southeast Asia. China has sought African copper and EQ copper to bridge its own gaps. On the one hand, as the tariff policy becomes clearer and the 232 tariff investigation advances, the LME-COMEX price spread will no longer fluctuate due to tariff expectations, and the copper cathode previously siphoned and hoarded by the U.S. will flow back to regions outside the U.S. On the other hand, the production ramp-up of Indonesia's Manyar, PT Amman smelters, and India's Adani smelters will increase the supply in Southeast Asia, jointly leading to a reduction in the demand for Chinese copper cathode in local Asian regions in the second half of the year.

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