Supply and demand margins improve support for copper prices

In the first half of 2020, the improvement of the international trade environment and the effectiveness of counter-cyclical adjustments are expected to restore the supply and demand of the copper industry. The supply and demand pattern of concentrates is tight, but it has eased from 2018, and refined copper is in a tight balance. The price elasticity of industrial inventory, copper for construction and the supply of small mines will be several factors that have an important impact on prices but are easily overlooked. Under the benchmark situation, the author predicts that the international copper price fluctuation space in 2020 will be 6400-5400 US dollars / ton, and the domestic price will be 50,000-45,000 yuan / ton. pattern.

It should be noted that if the international copper price falls, it is often triggered by the changes in the Sino-US negotiations, which will most likely be accompanied by the depreciation of the RMB, and the domestic price will decline less; vice versa. Therefore, domestic copper price fluctuations will be smaller than LME. In another hypothetical scenario, if China’s economic improvement is greater and lasts longer, copper prices will show a stronger upward trend due to extremely low inventory and some supply uncertainties.

China’s weak economic rebound
In 2020, China is expected to adopt a more proactive fiscal policy, and the growth rate of infrastructure investment will continue to pick up. After the supply-side reforms in recent years, the manufacturing capacity utilization rate has improved significantly. Even if it is compared with other countries horizontally, China’s surplus is not outstanding. Generally speaking, developing countries usually have low capacity utilization rates because of the implied expectations of rapid development in the future. Since 2019, China’s manufacturing investment has shown a cliff-like decline, which is significantly lower than the speed of economic development. This has brought about a continuous rise in capacity utilization. Then, in 2020, manufacturing investment will likely have a repairing growth. The long-term, short-term, stable real estate boom is almost a consensus, and investment will fluctuate lower in 2020. In summary, the author expects that the overall fixed asset investment will have a slight repair and a weak rebound in economic growth compared to 2019, and copper’s performance will be better than the second half of 2019.

In 2020, Trump is more likely to reach a phased agreement under election pressure, which is conducive to global trade, coupled with the effectiveness of China’s countercyclical control policies, and the global economy may improve slightly. However, from the perspective of 2-3 years or even longer periods, in 2020, the post-election policy shift in the United States will subject China and the United States and the global economy to huge uncertainties; China’s medium- and long-term structural adjustment and deleveraging will continue, and the economy will face significant risks Downward pressure; developed economies in Europe, the United States and Japan are facing low growth dilemmas with high debt and low interest rates and even negative interest rates; India’s growth is also encountering a bottleneck. As a result, the global geopolitical situation is becoming severe, and the probability of global economic growth will continue to fluctuate and decline.

Changes in copper industry inventory should not be underestimated
The copper industry inventory is embodied in electrical copper inventory, copper material inventory (copper rods, copper pipes, copper sheets and foils) and terminal finished product inventory (cables, air conditioners, automobiles). In each inventory item, electrical copper inventory is mainly smelters Raw material inventory of factory warehouses and copper processing plants. Copper inventory includes the finished product inventory of copper mills and the raw material inventory of terminal enterprises. It should be noted that the author takes the growth rate of the output of the end product as an independent variable when fitting the consumption growth rate. Therefore, the inventory of the end product is already included. This part should not be calculated when evaluating the inventory of the industry. The impact of terminal inventory on consumption must still be considered when evaluating the next period of consumption.

The copper industry chain is long and the downstream areas are extensive. Industrial inventory is a complex statistical task. It is difficult to accurately calculate the inventory level of each link. The author first estimated the copper product inventory level on the global industrial chain by using data such as the capacity of each link, the concentration of capacity, and the number of days of inventory research. Taking the data of 2018 as an example, assuming the same inventory cycle and similar inventory turnover around the world, the overall calculation shows that the inventory can fluctuate between 920,000 and 2.11 million tons. For the global copper consumption growth rate in the past 5 years, 2% -3% average, the impact of industrial inventory fluctuations deserves attention.

Under the industry’s extremely low copper inventory level, the superimposed dominant inventory is also at an extremely low value, and the elasticity of inventory fluctuations can be easily amplified in the short term. At the beginning of the third quarter of 2019, the author predicted that the completion and restoration of real estate is expected to boost copper consumption. The growth rate of real estate completion is slightly later than the author’s expectation. It is expected that the end of 2019 to the first half of 2020 will continue to boost copper consumption. If the other consumer sectors do not form a significant drag, the short-term stabilization of copper consumption is still expected to drive a wave of inventory replenishment. However, the overall economic boost is not obvious, and the magnitude of replenishment can not be expected too much. The neutral assumption is to return to the fluctuation axis of the past two years, and it is expected to promote 1% of consumption in the first half of 2020.

Construction consumption is underestimated
During the development of copper, the consumption of copper is often underestimated by the market. This is because in actual development, the direct use of copper is not very large. Real estate is the largest component of the entire construction industry, with an area of ​​between 60% and 70%. In fact, in the broad sense, copper for construction should also include industrial buildings such as factories and warehouses, public buildings such as education and commerce, and such buildings also bring considerable copper consumption. In addition, the market often pays attention to the copper consumption inside the building, and underestimates the supporting copper brought by the building.

In terms of real estate’s copper consumption, it is necessary to pay attention to the fluctuation of newly started and completed areas. The trend of newly started and completed areas is relatively consistent in history, but in the past two years, the two trends have been in opposite directions-since 2018, the newly started area has continued to grow at a high rate as a whole, and has begun to weaken in 2019; and the completed area has fallen rapidly compared to 2018 At the beginning of 2019, there has been a rebound at the bottom. Judging from the actual growth rate of copper consumption, 2018 has performed well, but 2019 has been relatively poor. This actual consumption is in line with the growth rate of newly started real estate area, but it is in line with the growth rate in the completion stage, which mainly occurs with copper. Big difference. One possible factor leading to this phenomenon is the delayed declaration of the real estate completed area, which has caused the dislocation of the statistics of the newly started and completed areas of real estate, while the newly started and completed areas in the real estate construction have not experienced such a large-scale dislocation. In this case, it is likely that the completed area counted in 2020 will rebound significantly, but the copper consumption of real estate will not be as strong as the data, because many completed areas in 2020 were completed in 2018-2019. . In addition, another important factor for copper consumption in construction in 2020 is new construction area. The author expects that the new construction that has been started in 2020 will gradually increase the pressure on higher growth rates, and if the decline may offset some of the completion of the support for copper consumption.

The price elasticity of small mine supply is considerable
The author considers several factors when making copper ore output estimates: First, the change in output includes two parts, the original output and the new output. The most important factor when considering output is the interference rate; the second is the price versus output The amount of change in this part of copper mines is easy to miss out of the table, mainly reflected in the output changes of small mines in various regions, and this part of the magnitude is easily affected by the price of copper, and its utilization rate will rise with the rise in copper prices, and vice versa When the price of copper is in a bear market, its utilization rate will continue to drop or even close the mines.

The author uses the output data of major mining countries to compare with the copper price. From the perspective of Chile, mines with an annual output above 80,000 tons have not had a strong correlation with the trend of copper prices in the past 10 years, while 80,000 tons In the following mines, changes in production and copper prices have a strong positive correlation over the past 10 years.

Through comparison, it is found that for every $ 1,000 change in copper price, the output of this part of copper ore will change by 6% in the same direction. In Chile, the total annual output of such mines is 250,000 tons, accounting for 4% of the total output. The same observations can be made for the copper output of other major producing countries. The author noticed that there is also a strong correlation between copper mines in Peru below 80,000 tons and copper prices. The annual output of such mines is 250,000 tons, accounting for 10% of Peru’s total output. And for every 1,000 US dollars in copper price fluctuations, copper mine output will change 8% in the same direction. In the same situation, the output of mines below 80,000 tons in Australia is about 230,000 tons, accounting for 23% of Australia’s total output. For every 1,000 US dollars in copper price fluctuations, copper mine output also changes by 8.7% in the same direction. Assuming that the annual output of copper mines below 80,000 tons in the world accounts for 10% of the total output, that is, 2.1 million tons, then based on the assumption of lower volatility, the price of copper fluctuates by 500 US dollars. Left and right, if the fluctuations are amplified, the impact is greater.

The end of low volatility?
As of the end of November 2019, the 60-day volatility of Shanghai Copper has fallen to 6.6%, a new low level for many years. Such a low volatility reflects the insignificant rise or fall in copper prices. From the perspective of mean recovery, such a low volatility is difficult to continue down. If the price continues to be at the current level, it may only fix the short-term volatility at the current level, but the space for volatility to go up. Is great. The global economy has experienced a year of decline, but stimulus policies have been introduced in various countries. Although no obvious rebound signal has been seen at present, as long as the confidence of the terminal rebounds, it is likely to bring about a rise in volatility.

The current state of volatility is very similar to 2016-before 2015, copper prices fell in a trend, but by 2016, the copper price consolidated at the bottom, the rise and fall were weak, and the volatility also declined. After 2016, The volatility of copper prices rose rapidly, exceeding market expectations. Such a long period of low volatility in copper prices is very rare.

Historically, the volatility has bottomed up, such as in 2010, 2013, and 2016. For some time in 2014, the volatility was low, but it only lasted for about half a year. When the volatility bottomed up in history, the price of copper could either rise rapidly or fall too quickly. However, the direction is basically the opposite of the trend before the low volatility. For example, in September 2011 and October 2016, the price rebounded significantly in the opposite direction as the volatility rose. The price of copper has remained weak since 2018. If the volatility rises, the price is more likely to rise than fall. After the volatility rises rapidly in December 2019, the future price of copper may still rise gradually.