Abstract: Neither supply nor demand supports higher copper prices; copper prices are expected to be range-bound with a downward bias in August.
Key views and market review: In the first half of July, mine operations in Chile were disrupted by the pandemic and two mines went on strike. The global economy rebounded in June as lockdowns were eased, so economic data released in July were relatively optimistic. Stimulated by both supply and demand, copper prices fluctuated sharply. But in the second half of the month, the US led the global resurgence of the pandemic and trade relations between the two countries deteriorated; risk aversion rose and copper prices fell slightly.
Overseas markets: Entering July, in addition to optimism about economic reopenings, the market was also worried about a second wave of infections. By the end of July, global confirmed COVID-19 cases had approached 18 million, and daily new cases had risen from less than 200,000 in June to 250,000. The US had over 4.5 million confirmed cases and over 150,000 deaths, making it the country with the most confirmed cases and deaths globally. In addition, after July, the pandemic rebounded again in Hong Kong, Europe, Japan, India and other places, and market risk aversion increased. Although progress was made in COVID-19 vaccine development in various countries, WHO Director-General Tedros Adhanom Ghebreyesus said at a July 31 WHO meeting that COVID-19 is a once-in-a-century health crisis, and its effects will last for decades; accordingly, economic outlook expectations have turned cautious. According to data released in July, the eurozone's consumer confidence index was -15 in July, below expectations and the previous reading; the US University of Michigan consumer sentiment index was 72.5 in July, also below expectations and the previous reading. In addition, the recently released second-quarter GDP figures were well below expectations, triggering pessimistic market sentiment. The eurozone's Q2 GDP was -15% year-on-year, missing the forecast -14.5% and the previous -3.1%; Germany's Q2 GDP was -11.7% year-on-year, missing the forecast -10.9% and the previous -1.9%; the US Q2 GDP was -32.9% annualized, better than the expected -34.5%, but still the most severe contraction since the Great Depression. After August, optimistic expectations are expected to continue to fade, and demand support will weaken.
Domestic market: In Q2, domestic GDP grew 3.2% year-on-year, above the expected 2.4%. In June, investment continued to recover faster than consumption in China. Cumulative fixed-asset investment fell 3.1% year-on-year in June, with the drop narrowing by 3.2 percentage points from the previous reading. Cumulative industrial value added fell 1.3% year-on-year, narrowing by 1.5 percentage points from the previous reading. Although cumulative investment was still negative year-on-year, current-month year-on-year readings were positive; industrial value added rose 4.8% year-on-year in June. Cumulative retail sales of consumer goods fell 11.4% year-on-year in June, rebounding from the previous -13.5%, but the current-month year-on-year reading was -1.8%, indicating that demand is still contracting.
Outlook: Since July, China's economic recovery has led the world, but overseas Q2 GDP shrank more than market expectations, and concerns about a second wave of infections caused copper prices to weaken in the second half of July. Consumer expectations in Europe and the US released in July also declined, and optimistic sentiment is expected to continue to weaken in August. On the supply side, the speculative focus on South American mines may ease. At the end of July, domestic TC rose by US$0.5 to US$48.5/t, and the market's expectation of tight supply weakened marginally. Neither supply nor demand supports higher copper prices; copper prices are expected to be range-bound with a downward bias in August.
1. Market Review
In the first half of July, mine operations in Chile were disrupted by the pandemic and two mines went on strike. The global economy rebounded in June as lockdowns were eased, leading to relatively optimistic economic data released in July. Stimulated by both supply and demand, copper prices fluctuated sharply. But in the second half of the month, the US led the global resurgence of the pandemic, trade relations between the two countries deteriorated, risk aversion rose, and copper prices slipped. As of the end of July, the SHFE copper main contract settled at 51,820.00 yuan/t, up 6.21%, with open interest of 316,789 lots, down 36,821 lots. LME copper 3-month settled at 6,376.00 USD/t, up 5.58%. LME copper investment fund long weekly positions stood at 28,487.59 lots, up 3,864.98 lots; short weekly positions were 6,028.02 lots, down 7,824.57 lots. COMEX copper continuous contract settled at 2.8595 USD/lb, up 4.76%. COMEX copper non-commercial long positions were 99,285 contracts, up 30,908 contracts; non-commercial short positions were 56,795 contracts, up 8,995 contracts.
Figure 1 LME copper and SHFE copper trends Source: Wind, Guodu Futures Research Institute
Figure 2 SHFE copper main contract volume and open interest (lots) Source: Wind, Guodu Futures Research Institute
Figure 3 LME investment fund long and short positions (lots) Source: Wind, Guodu Futures Research Institute
Figure 4 COMEX non-commercial long and short positions (contracts) Source: Wind, Guodu Futures Research Institute
Figure 5 LME copper cash-3-month premium/discount (USD/t) Source: Wind, Guodu Futures Research Institute
Figure 6 Spot copper premium/discount (yuan/t) Source: Wind, Guodu Futures Research Institute
2. Fundamental Analysis
(1) Overseas Markets
According to ICSG statistics, copper consumption in April 2020 was 2.067 million tonnes, down 1.5% year-on-year; cumulative consumption in the first four months was 7.766 million tonnes, down 1.9% year-on-year.
WBMS global copper supply-demand data show that in April 2020, the cumulative supply-demand deficit was less than 2,400 tonnes, with copper supply and demand tight in Q2.
Entering July, compared with June, the market was dominated not only by optimism over the economic reopening but also by concerns about a second wave of the pandemic. By the end of July, confirmed COVID-19 cases worldwide had approached 18 million, and the number of new daily cases had risen from less than 200,000 in June to 250,000. The United States had more than 4.5 million confirmed cases and over 150,000 deaths, the highest cumulative cases and deaths among all countries. In addition, after the start of July, the pandemic rebounded in Hong Kong, Europe, Japan, India and other places, intensifying risk aversion in the market. Although vaccine development in various countries progressed, WHO Director-General Tedros Adhanom Ghebreyesus said at the WHO meeting on July 31 that COVID-19 is a once-in-a-century health crisis whose effects will last for decades, and economic outlook expectations have accordingly turned cautious. According to data released in July, the eurozone consumer confidence index in July was -15, below both expectations and the previous reading; the U.S. University of Michigan consumer confidence index in July was 72.5, also below expectations and the previous reading. In addition, Q2 GDP figures released recently were significantly below expectations, triggering pessimistic market sentiment. The eurozone Q2 GDP was -15% year-on-year, below the expected -14.5% and the previous -3.1%; Germany's Q2 GDP was -11.7% year-on-year, below the expected -10.9% and the previous -1.9%; the U.S. Q2 GDP was -32.9% year-on-year, though better than the expected -34.5%, it was still the most severe contraction since the Great Depression. It is expected that after August, optimism will continue to fade and demand support will weaken.
Figure 7 Copper price and global PMI trends. Data source: Wind, Guodu Futures Research Institute
Figure 8 Manufacturing PMI in developed regions. Data source: Wind, Guodu Futures Research Institute
Figure 9 Manufacturing PMI in emerging markets. Data source: Wind, Guodu Futures Research Institute
Figure 10 ICSG: Global refined copper consumption: monthly value (thousand tonnes). Data source: Wind, Guodu Futures Research Institute
Figure 11 WBMS: Supply-demand balance: copper: cumulative value (10,000 tonnes). Data source: Wind, Guodu Futures Research Institute
Figure 12 Futures price and global visible inventory. Data source: Wind, Guodu Futures Research Institute
(II) Domestic market
In Q2, China's GDP grew 3.2% year-on-year, above the expected 2.4%. In June, investment continued to recover faster than consumption in China. In June, cumulative fixed-asset investment fell 3.1% year-on-year, with the decline narrowing by 3.2 percentage points from the previous reading; the cumulative year-on-year rate of industrial value added was -1.3%, with the decline narrowing by 1.5 percentage points from the previous reading. Although cumulative year-on-year figures for investment remained negative, the current-month year-on-year figures were all positive. In June, industrial value added rose 4.8% year-on-year, the second consecutive month of positive growth. In July, China's manufacturing PMI was 51.1, up 0.2 percentage points month-on-month; the non-manufacturing PMI was 54.2, down 0.2 percentage points month-on-month, indicating that the domestic economy continued to recover.
Looking at copper's specific downstream sectors, in the first five months, cumulative power grid investment was 113.4 billion yuan, down 2% year-on-year; cumulative power generation investment was 126.4 billion yuan, up 45.4% year-on-year. In home appliances, from January to June, refrigerator output was 37.593 million units, down 6.9% year-on-year; air conditioner output was 104.149 million units, down 16.4% year-on-year; and washing machine output was 36.202 million units, down 7.2% year-on-year. In automobiles, according to the China Association of Automobile Manufacturers (CAAM), from January to June, automobile output was 10.112 million vehicles, a cumulative year-on-year decline of 16.80%, with the negative growth narrowing by 5.3 percentage points from the previous reading; automobile sales were 10.257 million vehicles, a cumulative year-on-year decline of 16.9%, with the negative growth narrowing by 5.7 percentage points from the previous reading. The domestic automobile industry was still recovering. However, data from the National Bureau of Statistics showed that automobile consumption fell 8.2% year-on-year in June, suggesting the recovery in consumption may be slowing.
In June, cumulative infrastructure investment fell 2.7% year-on-year; the current-month figure rose 8.3% year-on-year, maintaining positive growth for three consecutive months.
Both property market sales and investment continued to recover. In July, due to stricter regulation of the real estate market, homebuying demand was released ahead of schedule, making the property markets in Shenzhen and other places red-hot. Judging from the guidance of recent policy meetings, the overall principle for the property market remains 'housing is for living, not for speculation'. In the second half of the year, infrastructure and machinery manufacturing will support domestic demand, providing support for copper consumption in China.
On the supply side, judging from recent conditions, the boost to copper prices from operating disruptions at South American mines has been fully priced in by the market, and speculation over this factor may ease later. At the end of July, the domestic treatment charge (TC) rose by US$0.5 per tonne to US$48.5 per tonne, and market expectations of a supply squeeze weakened marginally.
Figure 13 CPI and PPI. Data source: Wind, Guodu Futures Research Institute
Figure 14 Growth rates of industrial value added and export delivery value (%). Data source: Wind, Guodu Futures Research Institute
Figure 15 PMI. Data source: Wind, Guodu Futures Research Institute
Figure 16 Cumulative year-on-year change in power grid investment (%). Data source: Wind, Guodu Futures Research Institute
Figure 17 Year-on-year changes in automobile output and profits (%). Data source: Wind, Guodu Futures Research Institute
Figure 18 Year-on-year change in home appliance output (%). Data source: Wind, Guodu Futures Research Institute
Figure 19 Year-on-year changes in infrastructure, real estate and manufacturing investment (%). Data source: Wind, Guodu Futures Research Institute
Figure 20 Cumulative year-on-year change in copper ore imports (%). Data source: Wind, Guodu Futures Research Institute
Figure 21 Cumulative refined copper output and growth rate. Data source: Wind, Guodu Futures Research Institute
Figure 22 China copper smelter treatment charge (USD/dry tonne). Data source: Wind, Guodu Futures Research Institute
III. Outlook
Entering July, China's economic recovery was leading the world, but Q2 GDP in overseas markets contracted more than market expectations, and the market was concerned about a second wave of the pandemic. Copper prices began to weaken in the second half of the month. Consumer expectations for Europe and the United States released in July also declined, and optimism is expected to continue to fade in August. On the supply side, speculation over South American mines may ease. At the end of July, the domestic TC rose by US$0.5 per tonne to US$48.5 per tonne, and market expectations of a supply squeeze weakened marginally. Neither supply nor demand supports higher copper prices, and copper prices are expected to fluctuate with a downward bias in August.