Finance Association, May 23 (Reporters Liang Xiangcai and Zhang Liangde) “If there is no correction, everyone can go home early to celebrate the New Year.” Regarding the recent record high copper prices, Liu Hui, head of sales at a major non-ferrous metals trader in South China, lamented to the Financial Federation reporter. “I can't understand the current trend anymore. I hope it can be drastically adjusted to give the industry chain a respite.”

After rising to a record high in the past two months, the price of copper ushered in the correction Liu Hui was looking forward to. As of press release, the Shanghai Copper main link once fell by more than 4% in the intraday market today. Last night, the main consecutive decline of Lunton Copper was close to 4%, and the New York copper main chain fell nearly 6% in a row.

CFC reporters learned from multiple interviews that the current round of copper price increases are mainly due to differences in market expectations for future supply due to disturbances on the mining side. At the same time, macroeconomic expectations such as the Fed's interest rate cut, global inflation, and a recovery in the manufacturing industry are also “burning with fuel.” The current high copper price has broken away from fundamentals.

Regarding the future trend of copper prices, in the context of the tightening and difficult reform on the mining side, and the rise of demand-side emerging economies and new energy sources, most of the respondents held the view of “growing in a short time”.

Photo taken by a Financial Federation reporter at the Zijinshan Gold and Copper Mine mining site in Shanghang County of Zijin Mining

Non-ferrous metal “group carnival” copper prices hit a record high

In the past two months, the non-ferrous sector has been rising collectively. Among them, copper, the colored king, has risen sharply. Recently, the price of copper in Shanghai has reached a record high.

“The increase was unexpected. It was greatly affected by financial sentiment. Judging from the industrial chain, the current prices of most varieties have broken away from fundamentals.” Zhang Yu, general manager of a major nonferrous metals trader, lamented the recent rise in nonferrous metals.

The Financial Services Association reporter learned from Qifan Cable (605222.SH) as an investor that under the influence of high copper prices, terminal demand is more wait-and-see, and orders in the entire cable industry may shrink to a certain extent. The current price has basically broken away from the fundamental relationship between supply and demand.

Regarding the recent collective rise in the non-ferrous sector, an industry veteran told the Financial Association reporter that this round of increase is mainly driven by capital, and it is difficult to explain from a fundamental perspective; now, some varieties are showing short-term behavior where strong financial sentiment forces positions. After price deviations due to financial behavior, they will still return to the center of value.

Geng Zhiyao, a senior analyst at SMM Copper, told CFA reporters that the recent rise in Shanghai Copper was driven by COMEX's favorable real estate policies last week; at the same time, the Iranian president's helicopter crash caused unease in the market. The rise in precious metals and the rise and fall of silver directly drove the sentiment of copper futures, so copper futures rose again.

Jiang Lu, chief analyst of CITIC Construction Investment Futures Industrial Products, told CITIC Construction Investment Futures reporters that after mid-March, overseas inflation stickiness, economic indicators cooled, and non-US economies began to cut interest rates. The risk of stagflation is the underlying logic of the commodity sector, and different expectations have further given various types of gains, such as copper with tight supply expectations, tin where demand is expected to be overtraded, and precious metals with optimistic expectations for interest rate cuts by the Federal Reserve.

It should be noted that after the current price of copper futures continues to strengthen, the pace of domestic and foreign copper spot follow-up has slowed down, and the rate of promotion has continued to expand. According to Choice data, as of May 21, LME (0-3) copper is 117 US dollars, and Shanghai Wumao copper is 390 yuan/ton, all of which are historically high ranges.

Photo by a reporter from the Financial Association of a large copper processing factory

“Mining is more expensive than copper” due to supply-side disturbances and continuous poor expectations

Prior to November of last year, several agencies predicted that global copper production would increase by about 800,000 tons year-on-year in 2024, but since then, various supply side disruptions have suddenly occurred, and “mines are more expensive than copper”, which is rare in history, appeared due to poor expectations.

The current round of increases in domestic and foreign copper prices began in mid-March. On March 13, the China Nonferrous Metals Association convened a meeting of leading domestic copper smelters. In order to cope with the situation where smelting costs continue to drop due to insufficient supply at the mine end, each smelter may have plans to cut production in the future, but the exact amount of production cuts has not yet been clarified.

According to Choice data, the current copper concentrate spot processing fee (TC) has “bottomed out” from 94 US dollars/ton in September 2023 to -1 US dollars/ton as of May 17. Due to the shortage of copper concentrate, there is a rare inversion of “ore is more expensive than copper” in history.

In fact, the current round of copper concentrate shortages began in November of last year. At that time, the Cobley copper mine, a subsidiary of the overseas mining giant First Quantum, was forced to stop production because Panama ruled that the operating contract was unconstitutional. The copper mine had an annual production capacity of nearly 400,000 metal tons; in December, British and American Resources announced that it would lower the 2024 copper production guidelines by about 200,000 tons.

Entering this year, disturbances from the mining side have not stopped. In March, the Radomiro Tomic copper mine of Chile's National Copper Codelco, the world's largest copper supplier, suspended most mining activities due to a mining accident, and production has not yet resumed. In April, Zambia, the second-largest copper producer in Africa, had insufficient electricity supply to the mine due to a shortage of water and electricity due to droughts.

It should be pointed out that in the copper industry chain, the mining side has always had the most voice and the most profitable link. Therefore, every move on the mining side affects the nerves of the entire industrial chain.

Li Chaochun, vice chairman of Luoyang Molybdenum Industry (603993.SH), said at the company's annual performance briefing at the end of March that the recent disturbances on the copper supply side have actually far exceeded everyone's expectations. Judging from the copper production guidelines of major global mining companies from the fourth quarter of last year to the first quarter of this year, in addition to Luoyang Molybdenum and Zijin Mining contributing major increases, copper production cuts brought about by other mining companies around the world are roughly 800,000 to 900,000 tons.

According to data from the World Bureau of Metals Statistics, global copper production will be about 22 million tons in 2023, accounting for about 4% of this reduction in production.

It should be noted that in terms of demand for copper concentrate, domestic smelter production capacity has increased rapidly in the past two years, leading to a rapid expansion in smelters' demand for copper concentrate.

According to SMM statistics, domestic crushing production capacity will increase by 730,000 tons to 10.38 million tons in 2023, and is expected to increase by 910,000 tons in 2024. The annualized growth rate in these two years is as high as 8%. Judging from the launch period, it is mainly concentrated in the fourth quarter of 2023 and the first quarter of 2024.

Li Chaochun said that copper smelter processing fees have dropped to an all-time low since this year, which actually shows that it is difficult to find a mine in the market. At the same time, it is also related to the rapid increase in smelting capacity and the mismatch between upstream mine supply, but the smelting side is also increasing production capacity because it sees better downstream demand.

Demand momentum shifts emerging economies and the rise of new energy sources

Looking at it from a higher level, the shift in demand momentum is one of the important factors driving the current round of copper prices. That is, the industrialization of emerging economies and the rise in global demand for new energy sources will bring about a large increase in global copper demand.

On May 20, Qiu Zuxue, deputy director of Minsheng Securities Research Institute and chief analyst of nonferrous metals, was a guest on the Financial Federation's live broadcast and said that the old framework cannot currently be used to study the investment in copper metal. Against the backdrop of a steeper supply curve, copper is no longer sensitive to the total economy represented by real estate, and marginal demand has given way to emerging fields such as new energy vehicles, wind power, and photovoltaics. Furthermore, the rise of emerging economies represented by Southeast Asia and Mexico and supply chain restructuring have had a clear driving effect on copper demand. It is now difficult to simply judge the logic of the rise and fall of metals based on the real economy's sense of heat and cold.

Qiu Zuxue's views mentioned above were confirmed by Zijin Mining (601899.SH). Chen Jinghe, chairman of the company, said at the shareholders' meeting on Friday that the international market is highly optimistic about future copper prices. Judging from the background, the traditional domestic industrialization process has come to an end, but new markets such as Southeast Asia are on the rise, and demand for copper will be high in the future. Furthermore, in the context of global carbon control, strong demand for electrified, intelligent, and new energy equipment will also drive demand for copper.

The increase in demand for copper in the new energy sector has largely offset the negative impact of the decline in traditional domestic real estate. Recently, Xie Honghe, chief non-ferrous metals analyst at the Zhongtai Securities Research Institute, said that in 2023, global consumption of copper and aluminum from new energy manufacturing already accounted for 10% of total consumption, while domestic real estate completion end's consumption of copper and aluminum (referring to the direct use part in the narrow sense) will also be “compressed” to around 10% in 2023.

Data source: Zhongtai Securities Research Institute

Will there be differences in copper prices at the beginning of the major non-ferrous cycle, or will it “grow short and short”?

Judging from the logic of supply and demand, there is theoretical support for an upward trend in copper prices, but many people in the middle and lower reaches of the industry chain said in an exchange with the Financial Federation reporter that “the financial sentiment is too strong” and “the inventory is still so high that I can't understand the price anymore.”

Regarding the situation where high domestic copper prices coexist with high inventories, an institutional analyst explained to the Financial Federation reporter that as a dollar-denominated commodity, the price of copper comes from global inventory depressions, not from domestic inventory highlands. Overseas inventories are currently low, and once overseas inventories begin to be replenished, there will be a global shortage as a whole.

According to Choice data, as of May 20, domestic copper stocks were 402,800 tons, a high of nearly 4 years; copper stocks on the two major foreign exchanges were at historically low levels. New York COMEX was about 20,000 short tons, and London LME was about 110,000 tons.

Regarding the future trend of copper prices, industry insiders basically hold the view of “short term growth”.

Zhang Yu told the reporter that it is impossible for copper prices to keep rising. He believes that once a negative signal appears, capital will amplify it, leading to a deep correction in copper prices.

Goldman Sachs, the “commodity standard-bearer”, also expressed concern about the recent surge in copper prices. Goldman Sachs mentioned in the May 19 research report that although it is still optimistic about future copper prices as a whole, the recent high copper price has greatly suppressed order demand in the Chinese industrial chain. The current scenario is probably similar to the second quarter of 2021. After the sharp rise in the early stages, copper prices fell by about 9% from their peak due to negative feedback from terminal demand, and only then did copper prices embark on a more moderate and sustainable upward path.

Zijin Mining executives said at a recent performance briefing that the market was surprised by the recent rise in gold and copper. The company did not make a good judgment on copper prices in the second half of the year, but in the context of supply-side releases falling short of expectations, copper, as a global commodity, is still optimistic about the price for the next 2-3 years, driven by the recovery of overseas manufacturing and the power grid investment cycle.

Geng Zhiyao told the reporter that tight expectations on the mining side will not abate. As demand for copper from long-term new energy sources and AI computing power increases, it is expected that the global electrolytic copper gap will expand in 2026, the tight supply side will continue, and copper prices are expected to rise for a long time.

Li Chaochun said that due to the long service life of large-scale copper mines around the world, challenges such as declining grade and increased mining difficulty, the global copper mine side supply growth will fall short of expectations, and the balance sheet of supply and demand will also change significantly.

According to recent estimates by Zhongtai Securities, the excess situation in the three years before the global copper reform in 2025 may result in a gap of 150,000 tons between supply and demand.

Data source: Zhongtai Securities Research Institute

It is worth mentioning that industry insiders are divided on whether this round of rising non-ferrous metals, represented by copper, is the start of a major cycle.

Jiang Lu told the reporter that the current non-ferrous trading logic is more reflected in optimistic expectations of the macro, and the cooling crisis implied by actual demand and fundamentals is not fully reflected in the transaction. Therefore, from a long-term perspective, the current trend of non-ferrous metals is not an upward cycle in the strict sense of the word.

However, there are also analysts who have different opinions. Some agency chiefs told reporters that from a longer-term perspective, the supply side is affected by factors such as insufficient global mine capital expenditure and declining grade, and the demand side is in the context of emerging economies and the rise of new energy sources, and the current round of rising non-ferrous metals prices represented by copper can be seen as the beginning of a larger cycle.

(Liu Hui and Zhang Yu are all pseudonyms in the article)