Goldman Sachs analysts pointed out that China's cathode copper exports reached a record high in June, but inventories increased, and demand had headwinds. Meanwhile, African supply increased, and supply growth in the Congo and Zambia was underestimated.
After only two months, the copper market changed. In May of this year, copper prices hit a record high, driven by global supply concerns, shortfalls, and demand for a clean energy transition. By the close of trading this Thursday, the price of the main New York copper contract had fallen by more than 16% from the record high in late May, and hit a new low of more than three months on Thursday.
However, copper prices may not bottom out in the near future. Goldman Sachs analyst Adam Gillard warned in the report: “The situation continues to deteriorate. This is an excess market. I think (copper) prices will fall in the short term.”
Gillard gave some figures. In terms of trade flows, China's cathode copper exports reached a record high in June due to strong processing arbitrage. In terms of LME's inventory on the London Metal Exchange, China's exports have now increased dramatically and are being shipped to LME warehouses in Asia. Goldman Sachs expects that by the end of this month, Asia will increase China's exports by another 0.03 million tons.
Gillard said it is surprising that in terms of China's cathode copper demand, although exports set a record, seasonally adjusted data showed that such stocks in China were increasing, causing demand to shrink by 6% in June.
In terms of downstream inventory removal, part of the argument for a bullish external copper price market is based on price-related downstream inventory removal, and this kind of inventory removal is temporary. If terminal demand (power grid) recovers, demand for cathode copper will return strongly due to supply chain streamlining. Although admitting that the data was inaccurate, Gillard pointed out that downstream inventories remained high at the end of June, up 8% year over year, while the wire and cable operating rate was still down 12 percentage points year over year.
In terms of copper scrap, although weighted profits are still positive, smelting profits from spot copper are negative, causing smelters in China to switch raw materials from expensive concentrates to scrap steel. This explains why the copper processing fee TCRC fell to a negative value, and China's refined copper supply has increased by 7% since the beginning of the year. Gillard acknowledged that the scrap market is not transparent, and pointed out that media reports on tax quotas this Monday meant that supply growth in the second half of the year may be limited, but China's scrap production increased 12% (0.092 million tons) year on year in the first half of the year, which is the reason for the strong performance of anode RC. This increase in supply can quickly eliminate supply shortages.
In the copper-producing region of Africa, Gillard believes supply growth in the Congo and Zambia is undervalued, given China's massive investment. Mining companies such as IVN and CMOC will continue to surprise, which will lead to China's continued strength of SXEW (Solvent Extraction Electrolytic Accumulation) copper. We'll start to see this in officially released trade data. China currently imports 42% of refined copper from the Congo, Zambia and South Africa, a record high.
In Chile, a major copper producer in South Africa, Gillard did not deny that it faced supply challenges in the medium term, but pointed out that from January to May this year, Chile's copper supply increased 12% year on year because exports exceeded production, which may be due to the removal of refined copper from TC-related mines. This situation will eventually come to an end. Meanwhile, Chile's local supply growth is healthy.
Gillard concluded that the market is trying to ignore the 2024 copper production surplus because negative processing fees mean the 2025 deficit is unavoidable. Given the increase in supply in Africa, headwinds in China's demand, and a shift in the mechanical balance (shifting to surpluses, not just deficits), this argument will be challenged, and copper prices should fall as a result.
Gillard did not provide an estimate of the extent to which copper may fall further in the short term. However, many Wall Street analysts still believe that in the long run, there will be a shortage in the global copper market.