Source: Futures Daily
Boosted by the slowdown of the Fed’s interest rate hike and the expectation of domestic economic recovery, copper prices have skyrocketed recently. The main force of Shanghai Copper tested the 70,000 yuan/ton mark, and Lun Copper broke through 9,000 US dollars/ton. However, as the Spring Festival approaches, domestic copper processing and terminal companies are gradually on holiday, spot demand is weak, and the rise lacks fundamental resonance. Facing the Federal Reserve’s interest rate meeting after the Spring Festival, domestic demand expectations are still to be fulfilled, and we need to be cautious about high copper prices.
Positive policy expectations, weaker dollar boost copper prices
After the optimization and adjustment of domestic epidemic prevention measures, the peak of the first wave of epidemics has passed, the congestion delay index in major cities has increased, traffic and travel have actively resumed, and the scope of offline activities of residents has expanded. In addition, national and local government policies are frequently announced, and expectations for consumption recovery and real estate stabilization are optimistic. Although the actual economic data is weak, the optimistic expectation of improving demand cannot be falsified, which supports copper prices.
In the US, expectations for a soft landing and a slowdown in interest rate hikes are rising. In December 2022, the United States will add 223,000 new non-farm workers, exceeding the expected 203,000; December hourly wages increased by 0.3% month-on-month and 4.6% year-on-year, both lower than the previous value and expectations; each unemployed worker in November corresponds to 1.74 job vacancies, unchanged from the previous month. In this data structure, job vacancies form a buffer for the unemployment rate, and employment loosening is not accompanied by a sharp rise in the unemployment rate. At the same time, a fall in wages is conducive to reducing inflation, triggering expectations of a soft landing for the economy. The U.S. CPI fell by 0.1% month-on-month in December 2022, falling as scheduled and recording a negative value for the first time since May 2020. Inflation fell, supporting a slowdown in interest rate hikes, and the dollar fell, boosting copper prices.
Therefore, short-term domestic and foreign policies resonate upward, stimulating risk appetite. However, the expectations are relatively sufficient, and there are hidden dangers. On the one hand, the core CPI in the United States increased by 0.3% month-on-month, higher than the previous value of 0.2%, and the stubborn core inflation may keep high interest rates longer. Among them, the housing factor accounted for more than 30% of the US CPI, and the housing sub-item reached 7.5% year-on-year, becoming the main drag. On the other hand, the long-term and short-term yields of U.S. bonds continue to invert, and the risk of overseas recession still exists, so it is not appropriate to be overly optimistic. It is necessary to be alert to the risk of weakening after the expectation is full, and it is not recommended to aggressively chase higher.
Pre-holiday super-seasonal inventory accumulation, demand still to be fulfilled
As the Spring Festival approaches, the operating rate of domestic processing enterprises has declined, and downstream terminals have been on holiday one after another. The weekly operating rate of refined copper rods has gradually declined to 49% from mid-December 2022, and the price difference between refined copper and waste has rapidly expanded to the level of 2,400 yuan/ton, which is not conducive to the consumption of refined copper. The transaction in the spot market is sluggish, and the spot premium is transferred to the discount. Judging from the domestic copper social inventory around the Spring Festival in the past three years, the inventory increase in the two weeks before the Spring Festival in 2023 will exceed 30,000 tons, and the same period in 2022 and 2021 will be about 10,000 tons and 12,000 tons respectively, indicating that the slope of the inventory curve is relatively high , the accumulation speed is faster. In addition, from the perspective of absolute value, the absolute value of the social library in 2023 is also higher than that of the previous two years. From this point of view, this round of rise lacks fundamental resonance. Demand expectations after the holiday are waiting to be fulfilled, and attention needs to be paid to the acceptance of copper prices in the middle and lower reaches, changes in the domestic epidemic situation, etc.
However, copper demand in 2023 is still worth looking forward to. Power demand accounts for 46% of China’s copper consumption structure, which is related to wind power photovoltaic power generation equipment and power transformation and distribution systems. Recently, the State Grid stated that in 2023, the investment in the power grid will exceed 520 billion yuan, which will hit a record high and drive copper consumption. In addition, from the perspective of global new and old consumption, the post-cyclical attributes of real estate may make traditional consumption flat, and emerging areas have become the main increase in copper consumption. According to estimates, the global copper consumption of wind energy, photovoltaics and new energy vehicles is expected to increase from nearly 10% last year to 12%.
The market logic is complex and changeable, making transactions more difficult
On the whole, the current market expectations for the slowdown of the U.S. monetary policy and weak domestic recovery are relatively consistent, but there are differences in the degree of overseas recession and the pace of domestic and foreign policies.
The first quarter is still a combination of strong expectations and weak reality. After the Spring Festival, low inventory replenishment supports copper prices; signs of overseas recession are expected to gradually deepen in the middle of the year, recession transactions may restart, and risky assets are under pressure; in the second half of the year, both supply and demand are strong, and the domestic economy may recover. Established, and there may be expectations of the Fed cutting interest rates in the fourth quarter, copper prices may usher in a recovery. Of course, this is just reasoning based on the current situation. There are many disturbances in the futures market, and the trading logic is complex and changeable, so we need to wait and see.(Author unit: GF Futures)
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