Recently, some market players believe that copper prices will have a downward turning point, but we believe that under the background of high certainty of domestic economic recovery, it is not appropriate to be overly pessimistic about copper prices.
It is relatively definite that China’s economy will gradually recover. On the one hand, judging from the economic performance during the Chinese New Year and the PMI readings in January, the economy has been clearly orienting towards a recovery. The data of public transport of people returning home during the Chinese New Year in 2023 increased significantly compared with the same period in 2021-2022, but it has not yet recovered to the pre-pandemic level. In terms of travel, the tourism market has recovered about 88% compared to 2019. Consumption has maintained a relatively stable growth entering 2023. From a structural point of view, the growth of service consumption is faster than that of goods consumption. The PMI print in January is more intuitive, and the recovery of the manufacturing and service industries is relatively optimistic. In January, China's manufacturing PMI was 50.1, with an estimate of 49.8 and a previous value of 47. The non-manufacturing business activity PMI was 54.4, with an estimate of 52 and a previous value of 41.6. In terms of manufacturing, the new order index rebounded from 43.9 to 50.9, alluding steadily recovering domestic demand. Though affected by the Chinese New Year holiday in January, the production index still recorded 49.8, which was already close to the 50-point market. It is particularly worth noting that the index of finished products inventory rebounded from 46.6 to 47.2, and the inventory of raw materials grew from 47.1 to 49.6. Enterprises are expected to gradually turn from active destocking to passive restocking. In terms of the service industry, after the impact of the pandemic subsides, the economic recovery is more elastic. Among them, industries such as railways, air transportation, and insurance are with relatively high climate index.
On the other hand, the real estate industry is expected to improve marginally, further supporting the economic recovery. On the basis of the stimulus package for real estate introduced in the second half of last year, the government continued to highlight the importance of the real estate industry and boost confidence. On January 28, the executive meeting of the State Council pointed out that the local government should make good use of the policy toolbox, support rigid and improved housing needs, and do a good job in guaranteeing the delivery of buildings. At present, Shandong, Shanghai, Guangdong, Liaoning, Jiangsu, Chongqing and other places have included real estate consumption in their New Year economic development plans. Considering that the current real estate policy not only benefits the supply side, improves the financing environment of real estate companies, but also encourages rigid demand by reducing the cost of purchasing houses. In the future, the real estate industry is expected to gradually improve and achieve stable development. The optimistic expectations of the construction industry are also verified by the PMI reading. The construction industry business activity expectation index has been above 62 for two consecutive months.
In addition, overseas monetary policy expectations are dovish, which also underpins copper prices. In the United States, the Federal Reserve’s interest rate meeting will be held on February 2. It is expected that the market will focus on whether to stop raising interest rates and whether to place hope on a soft landing of the US economy. In terms of other central banks, the Bank of Canada, which had been hawkish before, made it clear that it would suspend interest rate hikes after raising interest rates by 25BP as scheduled, which greatly boosted market risk appetite.
In terms of fundamentals, low inventory and the seasonal low in the industry are also difficult to enable a complete reversal of copper prices. The accumulation of copper cathode social inventory during the Chinese New Year is seasonal, and the inventory as a whole remained low. Moreover, the industry is still in the off-season, it will take until the end of February or even March to confirm the consumption recovery. Therefore, the logic underlying short-term high copper prices may be difficult to prove false.
Looking forward, the currently rising copper price has priced in a more optimistic macro expectation. However, the high certainty of domestic economic recovery, the dovish monetary policy path overseas, and the current fundamentals make it difficult to support a complete reversal in copper prices.
However, copper prices may face greater downward pressure if the domestic economic recovery momentum fades, macro expectation weakens, and the copper spot industry fails to post strong consumption.
