Continuous Inventory Reduction: Why Has SHFE Copper Not Shifted to a Backwardation Structure? [SMM Analysis]

Recently, the market has seen a continuous decline in inventories, yet the SHFE copper structure remains in a contango state and has not shifted to backwardation. What are the reasons behind this? Below is a detailed analysis.

Recently, SHFE copper inventories have continued to decline, mainly due to the following reasons:

1. Seasonal recovery in consumption: Year-end orders in downstream copper industries (such as the power and home appliance sectors) have increased, driving up consumption and leading to robust spot demand.

2. After the settlement of long-term copper concentrate contract BM, domestic smelters are expected to face losses in smelting in 2025, resulting in a generally tight market supply.

3. Tight copper scrap supply has highlighted the substitution effect of copper cathode.

So why has the market not shifted to a backwardation structure? The main reasons are as follows:

1. Wide-open import window: Fluctuations in the RMB exchange rate and a decline in international copper prices have significantly increased the profitability of imported copper, leading to a large influx of near-port B/Ls and bonded warehouse warrants.

2. Significant new capacity from domestic smelters in 2025 is expected to ease long-term supply pressure, dampening the upward momentum of near-month contracts. This is particularly evident as inventory buildup is anticipated during the Chinese New Year in January.

3. Cautious attitudes among market traders toward stockpiling have limited the rise in spot premiums. This has made the pressure of near-month contracts on far-month contracts less pronounced, hindering the formation of a backwardation structure.

Looking ahead, whether SHFE copper will shift to a backwardation structure in 2025 depends on the following key factors:

1. The pace of imported copper arrivals and the production growth of domestic smelters will be critical variables affecting inventory levels and price structures.

2. If consumption continues to grow beyond expectations, it may drive an expansion in spot premiums, thereby shifting the futures structure toward backwardation.

3. Further stimulus policies from China and improvements in economic data could boost market sentiment, providing support for copper prices.

At present, the market still needs more time to digest changes in inventory and supply, while awaiting further confirmation from the demand side. In the short term, the SHFE copper market is likely to remain in a contango structure. However, the impact of raw materials on smelters is expected to intensify in 2025, making the post-holiday structure particularly worth monitoring.