SMM: Copper Prices to Fall 5,000 yuan/mt in 2022 from Current Level amid Muted Traditional Consumption

SHANGHAI, Dec 10 (SMM) - Global economy is recovering, and the US liquidity contraction is expected to strengthen. When the US dollar, measured by the constant value, appreciates, the absolute price of copper fell (relative concept); the depreciation of the non-US currency suppressed purchase demand and also suppressed demand. The appreciation of the US dollar improves the production enthusiasm of non-US copper-producing regions. As copper is priced in US dollar, the appreciation of the US dollar will lower the production costs. Most of the copper-producing areas are in South America and Southeast Asia.

The market was worried about stagflation amid high inflation data. The US CPI indicator has exceeded the target set by the Federal Reserve and has risen to 5.4% in July. PPI continues to rise rapidly, and the pressure of upstream price increases is constantly being passed on to consumers. Meanwhile, the US ISM manufacturing is trending lower after peaking.

The misalignment of the economic cycles between China and the United States has led to the divergence of the monetary policies of the two countries. The PPI of the mid-upstream industry hit a new high in China, the high raw material prices boosted the upstream profit, and the mid-downstream processing profit space was severely squeezed.

Domestic manufacturing PMI new export orders fell to a contraction range since May and the decline accelerated in the third quarter, indicating that the export support to the economy weakened. In the fourth quarter, the issuance of special bonds accelerated, and major projects accelerated, preparing for the growth in infrastructure investment next year.

The PPI of the mid-upstream industry hit a new high, the high raw material prices boosted the upstream profit, and the mid-downstream processing profit space was severely squeezed. Facing downward pressure on the economy, the monetary and credit policies have stabilised and tended to loosen.

Infrastructure Engineering VS Consumer Goods Industry

Damage to the supply from red warning of dual control in many regions of China in 2021 turned to the consumption. The recovery in the manufacturing industry in developed countries in Europe and the US combined with higher ocean freight weakened the export momentum. In terms of domestic demand, there are no obvious highlights except for new energy and the electronics industry.
Low copper delivery volume to the State Grid leads to weaker cable consumption. The investment in power grid projects dropped by 6.2% in 2020, and the planned investment for 2021 increased by 2.8%. State Grid plans to increase investment by 2.8% in 2021, but considering the increase in raw material prices, the copper consumption is not optimistic.

Nowadays, the support of terminal consumption is gradually deteriorating. In May, the newly started and completed construction of housing cooled down. Under the strict control of housing speculation, it is difficult for real estate to support copper consumption in the long run. Consumption boosted by the exports since Q4 2020 has begun to meet pressure. The problem of "chip shortage" will also affect the output of automobiles, and we shall pay attention to the impact on household appliances and other fields.

Short squeeze of LME copper

LME copper stocks have maintained a downward trend since late September, while the proportion of cancelled warrants has gradually increased, up from 26.84% on September 22 to 61.60% on October 11. The proportion of cancelled warrants on October 15 has reached 92.2%, pushing the available inventory to the lowest level since 1974. The LME cash-to-three-month contango soared to above $1,100/mt, the highest record since the 1980s. At the same time, the LME three-month copper rose rapidly, up from around $9,300/mt to a maximum of $10,452.5/mt. The main reason is that it is controlled by a big investor and the backwardation overseas. At the same time, the LME three-month copper rose rapidly, up from around $9,300/mt to a maximum of $10,452.5/mt, an increase of 12.4%.

Copper market outlook

SMM believes that there will be no obvious bright spots for traditional consumption, the real estate industry will continue to be sluggish, and no major investment in electricity. Although photovoltaic, photoelectricity, new energy and other industries are still developing rapidly, copper consumption next year is not optimistic as a whole. Copper prices are expected to stand at $8,600/mt or move between 63,500-64,000 yuan/mt amid rising supply and shrinking global liquidity.