Abstract: On the supply-demand front, overseas copper mine production is gradually recovering, easing supply pressure. Attention now turns to whether output catch-up will occur in the second half of the year, while downstream demand has fallen short of market expectations.
On the macro front, the current global environment of low interest rates and loose monetary policy continues to support copper prices. The Federal Reserve's quantitative easing is expected to persist for a considerable period. Domestic economic data for August continued to improve, and the Fed's latest policy meeting announced that low interest rates would be kept unchanged. In terms of supply and demand, overseas copper mine production is gradually recovering, easing supply pressure. The market is watching for possible production catch-up in the second half of the year, while downstream demand has underperformed expectations.
Copper mine supply is slowly trending toward looser conditions. According to Antaike data, Chile's copper mine output rose 3.7% year-on-year from January to May 2020. Peru's copper mine output fell sharply from March, dropping 26.6% year-on-year to 54,000 tonnes in March, down 34.7% in April and 42.2% in May, marking three consecutive months of steep declines. At present, the impact is mainly on Peru in Q2 and may hit Chile in Q3. In the first half of the year, many global copper mining companies also saw year-on-year output declines.
The 2020 annual copper concentrate long-term treatment charge (TC) was set at $62/tonne, well below the 2019 level of $80.8/tonne. CSPT set the Q3 floor TC for copper concentrate at $53/tonne, compared with $67/tonne in Q1. Jiangxi Copper, Tongling Nonferrous and Antofagasta signed an H1 2021 long-term TC of $60.8/tonne. The further decline in copper concentrate processing charges is expected to increase shutdowns and maintenance at domestic copper smelters. Disruptions to mine production or transportation at the front end, after a period of transmission, will lead to tighter copper concentrate supply in China, more smelter output cuts and maintenance, and continued declines in processing charges.
Smelters are more willing to raise production, with notable supply growth expected in September. As signs of a peak in processing charges emerge, smelters' willingness to operate has improved, leading to stronger-than-expected output growth in September. Refined zinc output in August was 509,100 tonnes, up 3.3% month-on-month and 1.98% year-on-year. Cumulative refined zinc output from January to August reached 3.869 million tonnes, up 3.68% year-on-year. Among this, August sample alloy output from domestic refined zinc smelters was 78,000 tonnes, up 3.94% month-on-month. August refined zinc production was higher than earlier expectations, as zinc prices continued to rise, repairing smelter profit margins and driving proactive output increases. In addition, some smelters in Gansu, Hunan, Inner Mongolia and other regions resumed production after maintenance. Entering September, driven by high profits, smelters in most regions continue to raise output except for some maintenance in Gansu. With resumptions in Inner Mongolia, Guangdong and Henan, September refined zinc production is expected to increase by 36,900 tonnes month-on-month to 545,900 tonnes.
With the import window mostly closed in July and August, copper imports in August are expected to decline somewhat month-on-month, and inflows of imported copper into the domestic market have slowed noticeably. However, downstream demand has not shown clear improvement since September. With the National Day holiday approaching next week, active stockpiling by downstream enterprises is expected to provide some support for spot copper premiums.
Domestic consumption is gradually improving. According to SMM survey data, the operating rate of copper tube enterprises in August was 77.87%, down 7.36 percentage points month-on-month but up 4.83 percentage points year-on-year. The off-season was more pronounced in August, with overall industry orders weakening. SMM surveys indicate that air-conditioning enterprise orders remained weak in August. Based on production schedules of key air-conditioning manufacturers, overall output declined month-on-month, and some plants were still in summer maintenance cycles, leading to a clear drop in demand for copper tubes. Small and medium-sized air-conditioning plants continue to face inventory pressure from the new energy efficiency standards, which also suppresses copper tube consumption. Compared with last year's unexpectedly cold property market, this year's steady performance in real estate and shipbuilding has contributed some demand, keeping copper tube operating rates above year-ago levels. The raw material inventory ratio of copper tube enterprises in August was 15.04%, up 0.93 percentage points month-on-month. August copper tube orders weakened and copper usage fell, pushing the raw material inventory ratio higher. However, the absolute volume of raw material inventories declined, mainly because persistently weak consumption expectations suppressed tube makers' stockpiling willingness, and manufacturers were reluctant to purchase while copper prices stayed high and volatile.
In August, automobile production and sales reached 2.119 million and 2.186 million units respectively, with production down 3.7% month-on-month and sales up 3.5% month-on-month, up 6.3% and 11.6% year-on-year respectively. Production and sales have now grown for five consecutive months, with sales growth remaining above 10% for four straight months. Growth in new energy vehicle production eased slightly, while August automobile production and sales continued to expand year-on-year.
Investment and consumption improved further in August. Cumulative year-to-date real estate development investment rose to 4.6%, and automobile retail sales grew a relatively fast 11.8% year-on-year. However, growth in real estate completed floor space and infrastructure investment has been relatively slow. We are now in the traditional peak consumption season, but this year's peak season may arrive later than usual, or prove weaker. Downstream orders have picked up somewhat, but this may be mainly due to inventory building ahead of the double holidays and optimistic market expectations, which could to some extent crowd out future demand.
Low inventories persist, but the off-season is not over. Market buyers are generally unenthusiastic, trading is subdued, and sellers show a strong inclination to hold prices firm, keeping spot premiums in a stalemate. Having recovered earlier from the pandemic, China saw inventory accumulation during the July-August-September off-season. Overseas markets continue to repair: LME inventories have fallen to just over 70,000 tonnes, the lowest since 2013, while global total inventories of 570,000 tonnes are also the lowest for the period.
Summary: Workers at Chile's Codelco have threatened action in response to pandemic risks, imported copper concentrate TC remains at low levels, and disruption events at overseas mines continue to emerge, leaving limited room for TC recovery. However, the gradual recovery in supply remains unchanged. In August, China's electrolytic copper output rose significantly both year-on-year and month-on-month, and is expected to continue rising in September. On the demand side, although the domestic peak season is still not evident in September, the gradual recovery of overseas economies continues to drive copper consumption. On the macro front, policy support is gradually tapering as the economy recovers, but the global environment of accommodative policy remains unchanged. Copper prices are therefore expected to remain in a high-level range-bound pattern.