Copper price fluctuations may slow down, consumption to have bigger impact on copper prices [SMM Copper Summit]

At the 2024 (19th) SMM Copper Industry Conference and Copper Industry Expo jointly organized by SMM and Shandong Humon Smelting Co., Ltd., SMM Big Data Director Ye Jianhua gave an outlook and forecast on the copper market price in 2024.

Macro

Manufacturing PMIs of the world's major economies show that the global economic recovery is recovering

According to the China Federation of Logistics & Purchasing, the global manufacturing PMI was 50.3% in March 2024, up 1.2 percentage points from the previous month, ending 17 consecutive months of running below 50%. The manufacturing PMI of major economies in the world showed an upward recovery trend in the global economy. Export data of China, South Korea, Vietnam and other countries also improved, giving the market macro confidence.

Downward pressure on the US economy does not seem to be great

US inflation continues to rise and the job market is strong. In this scenario, market expectations for interest rate cuts continue to decline. The delay in interest rate cuts is unfavourable for commodities with strong financial attributes (gold and copper), but with expectations of an improving economy, the high US dollar will have limited pressure on copper prices.

The economic data supporting the inflation are strong. The Federal Reserve has ended the interest rate hike cycle. As long as the economy does not fall into recession, copper prices will remain firm.

Review of the impact of eight historical interest rate cuts on copper prices

According to the review, before the interest rate cuts triggered by either economic recession or financial risks, copper prices faced downward pressure when the interest rates were high due to weak demand or reduced market risk appetite. The copper price decline in the scenario of economic recession was greater than that in the scenario of financial risk.

Notably, among the eight interest rate cuts since 1984, copper prices rose by 12.8% and 0.4% respectively when interest rates were high before the rate cuts in 1987 and 1995.

The impact on copper prices lied in the degree of demand decline. When the economy did not land or a soft landing occurred, copper prices rose. According to various economic data in the United States, the above-mentioned macroeconomic situation is more likely to occur, and we need to be vigilant against the recurrence of inflation.

China's PMI rebounded in March, expectations of economic recovery boosted market sentiment

China's manufacturing PMI was 50.8% in March, returning to the prosperity range after five months. That bolstered the capital market's expectations for economic recovery. In addition, as global production and consumption rebounded, the demand for inventory replenishment promoted the recovery of China's commodity exports, driving the new export order index in March to rebound significantly.

China's CPI fell more than expected in March. Against the backdrop of low prices, the market is expecting room for interest rate cuts and reserve requirement ratio cuts, which are likely to occur around the middle of the year. In addition, the market expects that the year-on-year decline in PPI will narrow rapidly from April, and is expected to turn to positive growth around the middle of the year.

Fundamentals

Recently, the spot TC for Chinese smelters has been traded at a minimum of $2/mt, and RC has remained at a low level. The profits of smelters purchasing spot copper concentrate have fallen seriously, and the risk of productivity decline of Chinese smelters has increased rapidly.

In 2024, the maintenance plans of global copper smelters mostly concentrated in the second quarter

The increase in global copper concentrate output mainly comes from expansion projects

The concentrated launch of global smelting capacity will intensify the supply shortage in copper concentrate

Copper concentrate shortage cycle arrives earlier

The long-term contract TC in 2023 was $88/mt and $80/mt in 2024.

In the second half of the year, smelters will be facing great pressure in negotiations on long-term orders.

China's copper cathode production is widely distributed, with production mainly concentrated in East China. Considering the tight raw material, it is optimistically expected that the production will increase by 700,000-750,000 tons in 2024.

According to the sample data of copper smelters surveyed by SMM, their planned output of copper cathode is 12.06 million tons, a year-on-year increase of 7.34% or 840,000 tons; in the future, there will be more new and expanded refining projects in China.

The impact of copper scrap on both supply and demand of copper cathode is increasing

As the copper cathode inventory in China exceeded expectations after the Chinese New Year holiday, the SHFE contracts maintained a contango structure and the spot discounts remained

Domestic copper cathode inventory remains high due to increased supply. Imports increased by 21.42% in Q1, and copper cathode production increased by 7.64%.

China's overall consumption has diverged after the Chinese New Year holiday, with actual consumption growth in the first quarter at 4.7%

Copper consumption to face medium-to-long-term pressure from real estate sector

Power system - power source investment growth is significantly higher than the power grid. In January-February 2024, power grid investment increased by 2.5% year-on-year, while power source investment increased by 12.6%

Ultra-high voltage and intelligent power grids are the investment priorities in 2024. The construction of ultra-high voltage projects will reduce the unit copper consumption of State Grid.

The new energy field and the home appliance sector will be the main driver of copper consumption

From 2023 to 2027E, the new energy industry chain from power generation to transmission to electricity consumption will drive an average annual growth of 1.5% in global copper consumption

The new energy sector will be the main driver of copper consumption, unit consumption and growth rates may miss expectations

Global copper cathode supply and demand balance: In the medium to long term, copper supply will still fall short of demand

SMM understood that, in the short term, copper cathode is not as scarce as imagined, and the rise in copper prices is mainly due to the medium- and long-term supply and demand imbalance of copper cathode As longs take profits and change their positions, copper prices will fall, giving downstream buyers an adaptation period. It is expected that the fluctuation of copper in the future may not be as fast as in the past month, and the copper consumption will also be reflected in the copper price. In terms of new demands, the proportion of copper consumption by the AI industry is still relatively low but will increase in the future. This, combined with the new energy industry chain, will drive the global copper consumption to grow by an average annual rate of about 2%.