July entered the traditional consumption off-season, with SHFE copper fluctuating mainly between 102,000 and 104,000 yuan/mt. What factors are driving the front-month strength?
This article sets aside macro factors and takes a closer look at fundamental indicators: why does the seasonal off-season exhibit a backwardation structure?
In fact, it all boils down to supply. The most direct indicator is the change in inventories (social inventories have destocked by about 60,000 mt over the past two weeks). The heavy destocking over multiple consecutive statistical cycles reflects both real supply-demand factors and unexpected factors (such as the recent typhoon, which added fuel at a very opportune moment).
The continued decline in spot copper concentrate TCs shows that smelters are still struggling to purchase raw materials. Coupled with copper prices consolidating within a range, copper scrap being disrupted by policy issues, relatively limited shipments, and the price spread between primary metal and scrap offering no advantage for consumption, anode plate supply is also relatively tight. The raw material supply tightness remains unignorable. In fact, clues can already be seen from China's copper cathode production in June, which unexpectedly fell by about 20,000 mt.
From July to August, large smelters are still undergoing maintenance, mostly affecting volumes supplied to east China. Despite efforts to keep long-term contract supply of copper cathode as unaffected as possible, the spot order market is indeed tight. Moreover, there is room for paper business in the spot copper cathode market, which has tied up some available cargoes, making actual available spot cargoes even scarcer. Looking at the price spread between non-registered and SX-EW copper, it has been rapidly narrowing recently. Downstream purchase willingness for such cargoes has increased, on one hand due to tight copper scrap, and on the other hand, as the marginal price increases for standard-quality copper and high-quality copper have widened, non-registered cargoes have become more cost-competitive.
Currently, there is divergence regarding the SHFE copper price of 103,000 yuan/mt, but most downstream players indicate that new orders exist when copper prices are between 101,800 and 102,800 yuan/mt. Coinciding with concerns over typhoon impact on cargo pick-up, cargo pick-up was concentrated during the working days last week, and active pick-up also occurred over the weekend in areas unaffected by the typhoon. Downstream operating rates partially improved last week, mainly in rod and tube sectors. The aggressive destocking last Thursday and this Monday did have consumption factors at play, but supply issues remain the main cause of the recent continued destocking. Additionally, due to the typhoon, some cargoes could not arrive at ports and enter warehouses normally, thus accelerating the destocking speed in the recent two statistical cycles. Supply is indeed tight, consumption is supported, and combined with financial factors and typhoon disruptions, these factors jointly favor the widening of the near-month backwardation structure. But in fact, even without the typhoon disruptions, the strengthening of the backwardation structure, given the above fundamental factors, had been "long in the making."
The market is concerned about whether a large inventory buildup will materialize after the typhoon impact ends, but this is not the case. Recently, imported cargo arrivals have been scattered, and the concentrated maintenance at smelters is unlikely to end in the short term, so domestic supply will not increase sharply. Even if consumption sentiment retreats slightly, inventory is unlikely to see a concentrated buildup. Moreover, against the backdrop of strong spot premiums, most cargo will be held as spot material in warehouses rather than as futures warrants.
Currently, the warrant inventory ratio in the Shanghai region is not at an absolute low compared to historical years, which caps further widening of the backwardation structure. It is expected that near delivery, the SHFE near-month contract backwardation could still widen to 300 yuan/mt, while Shanghai spot copper premiums are currently at 200 yuan/mt. Since copper prices began their upward trend in 2024, a strong coexistence of backwardation and spot premiums has been rare, so recent subtle changes in fundamental indicators have drawn significant attention.
![Price spread between futures contracts constrains spot copper performance; futures weaken while discounts hold steady [SMM North China spot copper]](https://imgqn.smm.cn/usercenter/ieria20251217171709.jpg)
