Attention needed for changing copper prices
Big movements in copper prices are often a sign of things to come in the stock market. It is also believed that copper and China’s macroeconomic situation are closely related. Recently, global copper prices have risen, bringing massively increased copper transactions, and some people are wondering why. In my eyes, there are several reasons for it.
First, there has been a reduction in mine output and increased demand. At the beginning of this year, the Chilean Copper Commission reported that global copper demand would grow by 2-3 percent this year and would cause a deficit in global copper supply of 200,000-250,000 tons, given the supply reduction at two major mines – Escondida in Chile and Grasberg in Indonesia. According to statistics from the International Copper Study Organization (ICSG), this year’s global refined copper consumption began to show growth from February, and as of the end of the second quarter, the global total consumption reached 11.64 million tons. Meanwhile, as of August, China’s copper production reached 11.13 million tons, an increase of 4.26 percent year-on-year.
Second, China has made great efforts in destocking. Reduction of copper production this year has provided support for copper prices, but the high global copper stocks in the first quarter made up for the cut in mine output. In this case, whether there will be a subsequent increase in copper prices depends mainly on the intensity of destocking and the demand situation. In terms of inventory, CME Group and the London Metals Exchange both indicated a slight increase this year with the total amount increasing by 85,198 tons as of October 13. However, the total inventory of the Shanghai Futures Exchange and tax-protected zones in China fell from 1 million tons at the end of March to 621,900 tons as of October 13. Clearly, the reduced inventory in China is far greater than newly added inventories in foreign exchanges.
Third, there has been a reduction in imports of scrap copper at the same time as import restrictions. The annual imports of scrap copper have been declining since 2012, and that trend has continued this year.
Furthermore, imports of scrap copper will be banned completely next year. In accordance with the Ministry of Environmental Protection, the overall solid waste imports will also decline this year.
Fourth, China’s manufacturing industry is recovering strongly. This year, the world’s three major economies showed impressive performance. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) in the US was 60.8 in September, the highest level in 10 years. The eurozone also saw positive data in the same period, with manufacturing PMI of 58.1, the highest figure in nearly eight years. As for China, its official PMI increased to 52.4 in September from 51.3 in January. Although the growth speed in China was relatively slow, it still shows the expansion trend in China’s economy.
The tension on the supply side won’t change in the short term. Currently, the domestic inventory is still possibly going to be further reduced and the fourth quarter is expected to see weaker demand. However, the downstream demand will provide support for copper prices before the end of this year, so the short-term copper prices are likely to see a basic level of around $6,500 per ton. In the medium term, there will still be upside momentum, so prices could possibly rise to about $7,500 per ton.
What’s more, higher copper prices will have a big impact on downstream industry. Companies will face risks from excessive copper inventory or from inadequate copper inventory.
Hence, it would be advisable for companies to build some virtual inventory in the futures market while conducting on-demand purchasing in the spot market.