SHANGHAI, Jul 20 (SMM) - SMM predicts that the global copper mine production will grow 5% year-on-year in 2022. It is expected that China's copper cathode output will rise 4% year-on-year in 2022. The surge in copper cathode supply in the second half of the year is a foregone conclusion, and the improvement in demand is of concern. Shrinking liquidity, coupled with fundamental pressures, will weigh on copper prices in the second half of 2022.
I. Macro front:
The US Fed aggressively raises interest rates amid high inflation, and recession fears keep investors on edge
U.S. CPI hit another 40-year high in May. The possibility of a non-linear and more aggressive measures by the US Federal Reserve has increased, and the confidence of the American people in the economy has gradually declined. The continued decline of the copper/oil ratio also gives us a warning that the economy has turned from "stagflation" to recession.
The European Central Bank is considering raising interest rates amid the dilemma of controlling inflation and facilitating economic growth
The European economy is neither stable nor balanced, but the inflation problem has to be addressed. The European Central Bank announced in June that it would raise its key interest rate by 25 basis points at its July meeting. And net asset purchases under the APP (Asset Purchase Program) will end on July 1, 2022.
The European Central Bank initiated the rate hike course, and the US dollar is briefly contained. However, in the process of joint tightening by European and American central banks, the euro will remain weak against the dollar in general.
Domestic policies are firm to stabilise economic growth, fuelling the economic to bottom out
Financial readings rebounded beyond expectations in May, reflecting a positive attitude towards steady domestic growth. But structurally, domestic demand is still weak. A loose liquidity environment is formed, but the effect of the policy needs to be further verified by the real economy.
Inflation remains high in the world's major economies, which has heightened recession expectations.
II. Fundamentals
SMM predicts that the global copper mine production will grow 5% year-on-year in 2022. The total production capacity of blister copper smelting projects in China and abroad in the past five years has reached 5.46 million mt, of which 2.23 million mt are likely to be planned.
Thanks to high TC of concentrate and high prices of by-product sulphuric acid, domestic smelters gain lucrative profits
Thanks to cheering TC and by-product sulphuric acid prices, domestic copper smelters have gained sound profits, driving the production enthusiasm. However, the operating rates of domestic smelters are already at a high level, and the marginal promotion through lucrative profits to China's copper cathode production is limited.
Intensive maintenance of smelters and sudden shutdown of production during the year have weighed on the annual production guidance
As a number of domestic smelters have been overhauled intensively, the copper cathode production bottomed in May (the second lowest in the year), coupled with the shutdown of smelters in Shandong. In addition, the progress of the new projects is less than expected, and the annual copper cathode production guidance is expected to be lowered. It is expected China’s copper cathode output in 2022 will record 10.38 million mt, a year-on-year increase of 4%.
In the first half of the year, the import window rarely opened, and the import volume of copper cathode remained low
In the first half of the year, the import window rarely opened, and domestic copper cathode imports remained low. The opening of the export window once encouraged domestic smelters to actively export copper cathode to the bonded areas or overseas warehouses, further exacerbating the supply tightness in China.
However, in the second half of the year, the output of domestic copper cathode is expected to rise significantly, suppressing the demand for imported copper. However, the different development orientation of China and foreign economies will bring opportunities through the SHFE/LME price ratio.
The tight supply of copper scrap also provides support for the de-stocking of copper inventories
Due to the domestic pandemic situation, the recovery of domestic copper scrap is not satisfactory. Domestic traders have had insufficient inventory on hand following the copper price boom last year, hence the supply flexibility of scrap has weakened.
The difference in the weekly operating rates of copper rods produced with copper cathode and secondary copper also partly reflects the supply tightness of scrap. The sharp drop in copper prices has narrowed the spread of copper cathode and scrap, which once dropped to the negative zone. As such, scrap users have reduced or suspended the production for lack of raw materials.
The expected domestic copper cathode growth partially materialises, but the social inventory is still at its historical low
The total domestic social inventory has been falling since March, and has since been at a historically low level for the same period in the year, which has provided obvious support for the backwardation structure of SHFE front-month and next-month contracts and the spot premiums. At present, some of the expected domestic supply growth has materialises (mainly from the resumption of production of smelters in Shandong), coupled with the marginal recovery of the consumption, the social inventory has been pinned to the bottom.
Affected by the pandemic, copper consumption is weaker than the same period in previous years
Due to the impact of the pandemic, the poor downstream household appliances and construction sectors have resulted in lower operating rates of copper cathode rods, copper plate/sheet, copper tube, and wire and cable.
In the first half of 2022, infrastructure construction fails to stimulate the economy, and the investment growth of power grid projects diverges
In 2022, State Grid plans to increase its investment by 1.2%; but considering the rise in raw material prices, the growth is not enough to significantly shore up the copper consumption. During the "14th Five-Year Plan" period, the national power grid investment is expected to be nearly 3 trillion yuan. Although it is significantly higher than the 2.57 trillion yuan and 2 trillion yuan during the "13th Five-Year Plan" and "12th Five-Year Plan" period, it is worth paying attention to the investment orientation, as well as the rising unit consumption caused by rising material prices.
Real estate generates increasingly less demand for copper, dragging on household appliances and other related industries
The related readings of real estate are sluggish. Although the government continues to introduce supporting policies, the real estate is still at the bottom after the pandemic situation improves, with few new orders. Due to the drag of real estate and the closing export window, the domestic demand and export orders have weakened simultaneously, and the output of home appliances experienced a negative year-on-year growth.
Traditional automotive and electronics industries are sluggish, while new energy-related industries maintain resilience
With the improvement of the shortage of imported parts and components affected by the pandemic, domestic suppliers of car parts and components in the Yangtze River Delta region have gradually resumed basic supply, promoting the rapid recovery of production nationwide in May.
The production and sales of new energy vehicles have continued to revive, and the penetration rate grows continuously. The automobile industry chain and OEMs in Shanghai have resumed work and production, and the prices of raw materials for power battery that affected power battery companies and OEMs have begun to fall. The supply-demand balanced will be more greatly reversed in the second half of the year, and the new energy vehicle industry has ushered in a turning point.
As the pandemic situation improves, the shortage of chips in the electronics industry will ease. But the demand for end-consumer electronics is weak, and new energy-related industries alone are unable to fully drive copper consumption.
Overseas inventories have returned to the downward channel, and the spot supply is still tight under the pressure of European and American supply chains
After the tide of domestic copper exports passes, LME inventories enter a downward channel again, among which European inventories are particularly low. Under the influence of the second-quarter maintenance of smelters in Europe, the supply tightness of spots is quite obvious. Constrained by limited transport capacity and rising freight costs, spot premiums in Europe and the United States continue to rise.
The surge in copper cathode supply in the second half of the year is a foregone conclusion and the improvement in demand is of concern
Shrinking liquidity, coupled with fundamental face pressures, will weigh on copper prices in the second half of 2022.
