The copper market breaks and still needs to wait for the accumulation of libraries

In early September, domestic and foreign copper prices still failed to break out of a trending market. Whether it will break through in mid-September remains to be seen. Previously, from a macro perspective, the copper market has lacked the momentum for a sharp rise, because the monetary policy of the central banks of the world’s major economies, including the Federal Reserve and the European Central Bank, is about to usher in an inflection point. There is no story on the demand side. Once the copper price rises to 70,000 Above RMB/ton, downstream demand will shrink.

However, the current epidemic still interferes with the supply of copper mines and scrap copper. If you take into account the expected increase in copper demand in the new energy sector brought about by the “dual carbon” goal, although the investment properties of copper have cooled, it has not been able to ebb. The author predicts that part of the copper has been locked and temporarily unable to flow, which makes the global copper explicit inventory has not been seen for a long time and the demand is cooling down.

The future failure of the copper market lies in the US dollar liquidity contraction and the rebound in US dollar real interest rates brought about by the Fed’s cut in QE. From the perspective of commodities, the real US dollar interest rate is the opportunity cost of holding copper and other commodities. Once the opportunity cost rises, the investment demand and consumer demand for copper will cool down. What’s more, an important condition for investment expansion in some new energy fields is that the financing cost is low. Once the financing cost rebounds, it will cause the debt pressure of some over-expanded enterprises to rise and affect subsequent investment.

The epidemic caused exports to pick up in August

Short-term resilience in external demand

The consumption of copper is divided into external demand and domestic demand. External demand is not the direct export of refined copper, but the export of finished products such as mechanical and electrical products; domestic demand is the domestic copper consumption in the fields of electricity, home appliances, automobiles, and real estate. Due to the spread of the global epidemic from July to August, Southeast Asian countries were affected, and export orders were again transferred to China, which made China’s exports in August increase more than expected.

According to data from the General Administration of Customs, in August, China’s total export value was 294.32 billion U.S. dollars, an increase of 25.6% year-on-year, the previous value was 19.3%, and the month-on-month increase was 4.1%; the total import value was 235.98 billion U.S. dollars, an increase of 33.1% year-on-year, and the previous value was 28.1 %, an increase of 4.3% month-on-month.

The export exceeded expectations due to several reasons: First, the Southeast Asian epidemic caused foreign trade orders to revert to China. Statistics show that in August, Vietnam’s exports fell by 1.1% year-on-year, and in July, the growth rate of exports was as high as 17.4%. While exports from Southeast Asia were affected by the epidemic, South Korea’s export growth rate also rebounded by 5.3 percentage points from July.

Due to Southeast Asia’s high share in the global electronics industry chain, the epidemic has affected Southeast Asian industrial production and exports, which caused China’s exports of mechanical and electrical products to increase to 23% year-on-year in August, and once fell to 18.1% in July. Among them, the export value of automatic data processing equipment and its parts and components increased by 12.8% year-on-year in August, an increase of 1.2 percentage points from the previous month. In August, exports of home appliances increased by 1% year-on-year, and last month fell sharply by 7.2% year-on-year.

The second factor is seasonality. Orders during the Christmas season will be shipped in August and September. According to survey information from shipping companies and freight forwarders, global shipping rates continued to be high in August, but overseas Christmas orders were ahead of schedule, resulting in an unexpected increase in exports in August.

The third is the spread of variant viruses such as delta in the world from July to August, which has narrowed the year-on-year decline in China’s defense epidemic material exports, and even the export of medical instruments and equipment has turned from a negative growth in July to a substantial positive growth. According to customs data, in August, exports of textile yarns, fabrics and products fell 14.9% year-on-year, which was 11.9 percentage points smaller than the decline in July. Exports of medical instruments and equipment increased by 17.9% year-on-year, and in July fell by 17.1% year-on-year.

However, the downward trend of global trade following the peaking of the global economic recovery will not change. The epidemic may affect the monthly export fluctuations of some countries such as China. Data show that in May this year, the global manufacturing PMI peaked, which may indicate that the economic momentum that promotes the rapid repair of trade is slowing. In addition, the forward-looking new export orders index in the WTO economic barometer fell back in July. This index has a good lead in the trade prospects, or it may also indicate that the pace of recovery may gradually slow down.

Core CPI falls

Domestic demand continues to weaken

From the perspective of macroeconomic operation logic, the core CPI is closely related to economic prosperity and demand cycles. Since food and energy prices are greatly affected by supply, the core CPI excluding food and energy can better reflect economic growth and industrial demand growth. In August, the year-on-year growth rate of core CPI dropped by 0.1 percentage point from the previous month, which may reflect the slowdown in demand expansion due to the slowdown in economic growth.

From the perspective of bulk commodity imports, commodity demand is cooling. The year-on-year growth rate of imports in August was slightly faster than that in July, mainly due to price factors, not the accelerated growth of imports. According to data from the General Administration of Customs, in August, the import volume of iron ore, crude oil, and copper fell by 2.9%, 6.2%, and 41.1% year-on-year, respectively, but the year-on-year growth rates of imports were 95%, 59.8%, and -10.4%. The amount and the amount obviously do not match.

In terms of finished products, the year-on-year growth rate of imported electronic products was relatively stable. In August, integrated circuits, automatic data processing equipment and parts, and liquid crystal display panels increased by 16.2%, 19.3%, and 0.7% respectively, basically the same as in July. However, the year-on-year growth rate of imports of automobiles and parts fell sharply, and the compound growth rate of automobiles and automobile chassis was -7.2% compared with 2019, which reached 10.6% in July.

The European Central Bank is the first to announce Taper

The Fed will follow

The European Central Bank took the lead in announcing Taper, and the euro rebounded against the dollar in the short term

On September 9, the European Central Bank announced the decision of the monetary policy meeting to maintain the three key interest rates unchanged, in line with expectations. At the same time, the European Central Bank announced that it would slow down the purchase of debt under the Emergency Anti-epidemic Bond Purchase Program (PEPP) in the fourth quarter. Judging from the data released by the European Central Bank, the net purchase of PEPP in August was 65 billion euros, which was significantly lower than the 87.5 billion euros in July and the lowest value since March. PEPP is known as the emergency anti-epidemic purchase plan. It is a non-standard monetary policy measure that was launched in March 2020 to deal with the serious risks that the new crown pneumonia epidemic poses to the monetary policy transmission mechanism and the outlook of the euro zone. The total amount is 1.85 trillion euros, and the purchase is relatively flexible. Once it is judged that the epidemic crisis phase is over, the council will terminate the purchase of net assets under PEPP, but not before the end of March 2022.

The liquidity provided by the asset purchase plan (APP) + emergency bond purchase plan (PEPP) purchases in 2020 and 2021 are: 1.12 trillion euros and 1.09 trillion euros, respectively. If APP purchases are not adjusted, the liquidity released through asset purchase channels will be significantly compressed to only 240 billion euros, and the pace of reduction will be slightly radical. As of July 2021, the cumulative net purchase scale of PEPP has reached 1.27 trillion euros (approximately 68.6% of the purchase target), far exceeding the net purchase scale of the asset purchase plan APP in the same period.

In terms of inflation, the European Central Bank said that inflation may moderately exceed the target in the short term. The key interest rate will remain at the current level or lower until it is determined that inflation will rise and remain at 2%. The Management Committee is ready to properly adjust all its tools to ensure that inflation remains stable at the target level of 2% in the medium term.

Unlike the Fed’s dual currency goal, the European Central Bank’s monetary policy takes inflation control as its primary goal and has a lower tolerance for inflation. Recently, European inflation has exceeded the ECB’s forecast and policy goals. Many ECB officials expressed concern about the inflation outlook, and their speeches were hawkish. Therefore, the ECB announced Taper before the Fed.

In the short term, the European Central Bank announced before the Fed that the Taper may drive the rise of the euro against the US dollar. The fall of the US dollar index is conducive to the rebound of copper prices. Cut the QE, the US dollar liquidity will shrink faster than the European Central Bank, then the nominal interest rate of the US dollar and the US dollar exchange rate will rebound strongly, which will have an impact on copper investment demand and consumer demand. By observing indexes other than Citi’s economy, the degree of short-term economic weakness in Europe is weaker than that of the United States, so it is normal for the euro to rebound against the dollar.

The conditions for the Fed to cut QE are already in place

Although the new non-agricultural employment data in the United States in August is far less than expected, the author believes that the negative effect of the Fed’s continued implementation of QE under the current high inflation environment may outweigh the positive effect. The Fed’s Taper during the year is the general trend:

One is that high inflation may pose a challenge to the MMT theory practiced by the Fed. The MMT theory generally believes that the Fed’s financing of the US fiscal deficit is costless, that is, “domestic debt is not a debt”, but the eventual exit of this type of debt will eventually require a return to government spending. In the table. If government spending is fully monetized, then refinancing will inevitably trigger an increase in interest rates, which will eventually bring a huge negative impact to the US economy.

Second, the US financial system is flooded with a lot of liquidity. If the Fed does not withdraw from QE in time, it may bring risks of stagflation and asset bubbles, as well as the friction costs that must be paid in the process of exit. Banks and other financial institutions currently have no way to create commercial credit for excess reserves, which has caused a large amount of liquidity to flow into the short-term Treasury bond market, the inter-borrowing market, and the repo market. The spread between the interest rates continues to converge, and the Fed’s overnight reverse repurchase (ON RRP) scale continues to expand.

The author believes that the Fed’s delay in releasing the signal to cut QE aims to reduce the impact and friction costs of the QE withdrawal from the market. Therefore, the Fed will withdraw from QE when high inflation and excess bank reserves cannot create commercial credit. The general trend, the current market only cares about the short-term rhythm, has not paid attention to this trend.

In addition, there is already a labor shortage in the U.S. job market. With the expiration of the U.S. emergency unemployment benefits, the number of U.S. employed persons will increase sharply in September, and the unemployment rate will be close to the natural unemployment rate. Under the circumstances of high inflation, the Fed will not Reasons to postpone QE cuts.

According to the results of the July Job Vacancies and Labor Flow Survey (JOLTS) released by the US Bureau of Labor Statistics, there were 10.9 million JOLTS job vacancies in the United States in July. After breaking through the 10 million mark for the first time in June, it once again set a new record high, expected to be 10 million. The data was revised up to 10.2 million in June.

In July, the number of independent resignations rose again, an increase of 103,000 from June, and the second highest level of 3.97 million in history, only lower than the high of 3.992 million in April this year. The number of voluntary resignations is usually regarded as a barometer of confidence in the job market. The higher the number of voluntary resignations, the less the working population is worried about being unable to find employment. The current number of voluntary resignations is much higher than the level before the new crown pneumonia epidemic.

In addition, the Federal Reserve released the latest “Beige Book” regional economic survey report, showing that the description of overall US economic activity has been slightly lowered to “moderate growth” and that inflation has remained stable at a high level. Among them, half of the Federal Reserve jurisdictions said the rate of price increases was “strong”, and the other half of the jurisdictions stated that the rate of price increases was “moderate”; due to widespread resource shortages, input price pressure continued to prevail, and many companies still reported difficulties in sourcing key inputs . The main factor restricting new employment is labor shortage, not weak demand. Due to “continuous and widespread” labor shortages, wage growth has accelerated in some regions, and most Fed jurisdictions describe wage growth as “strong”, which includes all the Midwest and Western regions. This means that US inflation is under pressure from labor wage growth.

Brought by new energy vehicles

Copper consumption growth point may be overly optimistic

In the short term, the rapid growth in the production and sales of new energy vehicles and the increase in the penetration rate of new energy vehicles brought about by the “dual-carbon” target have a significant boost to copper consumption. According to statistics from the China Passenger Car Association, the retail sales of passenger vehicles in August fell by 14.7% year-on-year. In August, the wholesale sales of new energy passenger vehicles reached 304,000, a year-on-year increase of 202.3% and a month-on-month increase of 23.7%. In August, the domestic retail penetration rate of new energy vehicles was 17.1%, and the penetration rate from January to August was 11.6%, a significant increase from the 5.8% penetration rate in 2020. In August, the wholesale penetration rate of new energy vehicle manufacturers was 20.1%, and the penetration rate from January to August was 12.8%, a significant increase from the 5.8% penetration rate in 2020.

However, the author believes that the development path of batteries for new energy vehicles is too single, and the development of diversified batteries in the future may mean that copper is not the only negative electrode material, and the total consumption growth may be overly optimistic.

At present, the power battery industry has a structural imbalance between supply and demand of “insufficient high-end production capacity and excess low-end production capacity”. From the perspective of the supply side, the acceleration of production capacity expansion by head battery companies is to increase the supply capacity of high-end production capacity. Although the smart car industry chain will give birth to new business models, it cannot eliminate the cyclicality of automobiles.

At present, China’s energy storage industry has more than 20 mainstream technologies, of which the power battery technology path is mainly concentrated on ternary lithium and lithium iron phosphate. There should be more paths for power batteries, and it is still a technical run-in period, and it is not certain which technology has the most promising development prospects. Enterprises should carry out patent layout to prevent possible patent barriers in the future, instead of focusing on investing in a power battery technology.

The Ministry of Industry and Information Technology stated that it will support sodium batteries to accelerate the transformation of innovation achievements and support the construction of advanced product production capacity. At the same time, according to the industry development process, the relevant product catalog will be improved in time to promote the accelerated application of high-performance and qualified sodium batteries in new energy power stations, transportation tools, communication base stations and other fields; promote the full commercialization of sodium batteries through the collaborative innovation of industry, university and research.

The copper market has to wait

The recovery of copper mine and copper scrap supply has slowed down, and refined copper production has rebounded significantly

From the perspective of copper concentrate processing fees, due to the severe overseas epidemic in August, although the output of copper ore in Chile, Peru and other places maintained a recovery growth momentum, transportation was affected, and the upward trend of processing fees for imported copper concentrates eased. This means that the recovery of copper mine supply is showing signs of slowing down. According to research data from Asian Metal, as of September 9, processing fees for 25% of Mmin imported copper concentrate were reported at US$58-US$63/ton. Although much higher than the same period last year and the beginning of the year, it was slightly lower than the end of August by US$1. The upward momentum has eased.

In terms of copper scrap, due to the Southeast Asian epidemic, the import of scrap copper in Malaysia and other places has been affected to a certain extent, and the processing fee of blister copper in China has also fallen to a certain extent. Data show that as of September 9, 98.5% of the blister copper processing fee fell to 1460-1660 yuan / ton, a significant drop from the year’s high of 1900-2100 yuan / ton, and almost the same as the same period last year.

However, the author found that the output of refined copper recovered faster, which is also an important reason for the decline in imports of refined copper in August. According to Antaike’s survey, in August 2021, the 22 sample enterprises produced a total of 767,600 tons of copper cathodes, a year-on-year increase of 5.29% and a month-on-month increase of 2.73%. The output in July was revised to 747,200 tons. In terms of different enterprises, the output of refined copper in large enterprises has grown rapidly, while the recovery of small and medium-sized enterprises due to power restrictions and other factors has been relatively small. In September, Guangxi Jinchuan, Nanguo Copper, Hunchun Zijin and other companies have plans for maintenance, but overall there is no hindrance to the recovery of refined copper output, because the copper concentrate processing fee is higher than the same period last year and the price of by-products such as sulfuric acid is high.

Consumption lacks bright spots, but the tired library still needs to wait

From the perspective of exports of major products in August, the growth rate of exports of mechanical and electrical products has rebounded, especially for home appliances from a sharply negative growth in July to a moderately positive growth, which slightly improved the external demand for copper, but the domestic demand remained weak. Using copper rods to measure copper consumption in the power industry, we found that copper rod processing fees were almost the same as the same period last year, but lower than the level when consumption was at a high point when work and production resumed in May last year. Data show that on September 9, 8mm copper rod processing fees were reported at 590-790 yuan/ton, compared with 550-750 yuan/ton in April last year.

From the perspective of spot premiums and discounts, in early September, copper spot premiums dropped significantly, which means that consumption is cooling, but domestic copper stocks are still falling, which may mean that some copper is locked and temporarily unable to circulate. However, once the Fed announces the reduction of QE, investment demand for copper will ebb, and the locked-in copper may re-circulate, and the copper market will only accumulate.