Summary: The trading logic for copper is currently undergoing a shift. The temporary supply-demand mismatch caused by the pandemic is reverting, U.S. stimulus negotiations have broken down, and market risk appetite is retreating. With both fundamentals and macro sentiment turning weaker, copper prices are expected to move lower.
After hitting a high in mid-July, copper prices have been fluctuating lower, and fell below 50,000 on the evening of August 7. We believe the trading logic for copper is now shifting. The temporary supply-demand mismatch caused by the pandemic is reverting, U.S. stimulus talks have collapsed, and market risk appetite is declining. With fundamentals and macro sentiment both weakening, copper prices are likely to trend lower.
1. Failure of the new U.S. stimulus bill turns market sentiment cautious
On August 7, the U.S. Congress remained deeply divided over a new stimulus package and ultimately failed to reach an agreement. Although Trump signed executive orders to extend certain expiring pandemic relief measures—including an extra $400 per week in unemployment aid, deferred payroll taxes for those earning less than $100,000 a year, eviction protections for renters, and student loan relief—the support is relatively limited. Market sentiment has therefore shifted from risk appetite to caution, triggering a sharp decline in copper prices.
Congress is about to enter its recess, but we believe a stimulus deal could still be reached in September, at which point market sentiment may again swing from risk-off to risk-on.
2. Copper mine and refined copper supply recovers
After the outbreak in South America, market concerns over copper mine supply shortages intensified, and spot TC for copper concentrate has kept falling since mid-March. However, Chile's epidemic control measures have been effective, and the impact on operating mines has been limited. June copper output fell by only 0.6%, while first-half copper mine output rose 3% year on year. In July, workers at two Antofagasta mines in Chile voted in favor of a strike, but the strike was later avoided after government mediation, so production disruption rates declined. As the largest copper-producing country, Chile's production disruptions caused by the pandemic and strikes have fueled concerns over copper mine supply. At present, the actual impact is far smaller than the market expected, leading to a correction of expectation gaps. Moreover, Codelco has resumed production and projects suspended due to the pandemic, indicating that the impact of the epidemic is weakening further.
Peru has been more severely affected by the pandemic, with copper output plunging in April and May. But after easing pandemic controls, June output rose 40.8% month on month. According to SMM, the road blockades by local residents at Peru's Las Bambas and Antacappay mines are still under negotiation and mediation, and are currently expected to be resolved by late August. Overall, copper concentrate supply remains tight, but the shortage has improved significantly.
The raw material shortage for Chinese smelters has eased, and maintenance in August has decreased markedly. SMM estimates China's refined copper output in August at 793,900 mt, up 5.92% month on month and 3.41% year on year. Codelco also restarted its Chuquicamata smelter in August. Therefore, refined copper supply is rebounding both at home and abroad.
3. Domestic consumption weakens and scrap copper substitution strengthens
August remains the off-season for consumption. Cable companies generally report fewer orders, and operating rates for cable and refined copper rod producers have declined month on month. SMM survey data shows that in August, the operating rate for wire and cable enterprises was 99.92%, down 1.7 percentage points month on month, while the operating rate for refined copper rod producers was 75.85%, down 0.32 percentage points.
As copper prices remain at relatively high levels, the spread between refined and scrap copper has widened, and demand for scrap copper has improved notably. In addition, the first two batches of scrap copper import quotas for Q3 have been announced, totaling 188,800 mt. In H1, scrap copper imports were 430,000 mt, with quotas of 540,000 mt, leaving about 110,000 mt of unused quotas. With Q3 quotas of around 290,000 mt, supply is relatively ample. As a result, scrap copper supply is recovering, the refined-scrap spread remains high, and the substitution effect of scrap copper is strengthening, which will further erode refined copper consumption.
Overall, fundamentals are weakening at the margin. The previous bullish factors have been fully digested, while bearish factors are accumulating and market sentiment is turning cautious. Copper prices are likely to weaken in August. If prices break decisively below 50,000, the next target would be 48,000. The collar strategy recommended earlier—buying CU2009P50000 and selling CU2009C54000 options—can be maintained.