CITIC Futures: Copper faces downward pressure
Based on the logical review of the current high copper prices and deducing the logic of the market outlook, we believe that the factor triggering future interest rate cuts will be the biggest negative macroeconomic factor. Coupled with weak industrial demand, it is expected that copper prices will face correction pressure. At the same time, based on the support of new energy consumption for copper prices, the overall operating range of copper prices is expected to narrow compared with the past three years.
Logical review of high copper prices
Since 2024, due to repeated revisions of overseas interest rate cut expectations, dragging down the traditional demand off-season, and supporting domestic policy expectations, domestic and external copper prices have been in the range of 67,500-70,000 yuan and 8,120-8,700 US dollars/ton respectively, repeatedly bottoming out and recovering. The current copper price has retreated to a mid-range level for the second time this year. At the same time, Shanghai Copper maintains a Back structure in recent months, reflecting that the market's expectations for the global economy and demand prospects and copper prices are weak. CFTC data shows that COMEX copper fund positions have always been net short since 2024, and the mainstream market tends to be bearish on copper prices.
Even if overseas interest rate cuts are expected to be repeated, they will still be bullish for copper prices. Judging from the timeline for the start of the Fed's interest rate cut, the delay in timing is a positive feedback result of the expected soft landing of the U.S. economy. In the process of achieving long-term low inflation of 2%, the manufacturing PMI, unemployment rate, and new non-agricultural employment have been stable. This has also caused the release of almost any stronger-than-expected economic data, while downplaying interest rate cut expectations and strengthening the soft landing. Confidence, therefore the postponement of interest rate cut expectations will only have a limited correction effect on copper prices, rather than greater downward pressure. Judging from the results of the interest rate cut, as the most radical interest rate hike cycle in 40 years, the rapid tightening of liquidity has created many uncertainties for the economy and demand prospects, and the start of interest rate cuts means that demand is expected to recover.
Strong expectations for domestic support policies. In January 2024, the domestic unexpected reserve requirement ratio cut and the LPR interest rate cut in February stimulated copper prices to reach a periodic high. In March, it is expected that the market's optimistic expectations for policies will still provide some support for copper prices, and attention will be paid to the strength of the signals released by the policies.
Expectations of tight copper mine supply still exist. In October 2023, the CobrePanama copper mine with an annual output of approximately 300,000 tons ceased production, and the market's expectations for a global copper mine supply shortage increased. Superimposed on the expansion of global copper smelting capacity, the supply and demand of copper mines and refined copper tightened, and domestic copper concentrate spot roughing Prices quickly fell to around US$20/dry ton, a new low in the past 14 years. In the domestic first-quarter CSPT group meeting, some members called for joint production cuts, and the CNIA recommended production cuts or even early maintenance and shutdown. The tight supply of domestic refined copper before the Spring Festival is expected to provide strong support for the copper price center. However, the survey found that only a few domestic smelters started maintenance in the first quarter, and the supply of refined copper is expected to remain stable in the short term. Pay attention to whether the tight expectations at the mine end can be realized to supply refined copper.
Insights into the market outlook's downside risk
The background triggered by interest rate cuts may be the biggest macro negative. The negative impact of continued high interest rates on the U.S. economy has been reflected in real estate, consumer confidence and other data, and local risks are still spilling over. Once the economic cooling trend is confirmed, the Federal Reserve has to give in and passively trigger interest rate cuts. We believe that this is not a small-probability event. From the bankruptcy of Silicon Valley banks in 2023 to the decline of community bank stocks in New York in the United States and Canadian pension funds selling commercial real estate in 2024, there is great uncertainty in the global economy, especially the vulnerability of the real estate industry. Still exist. If the Federal Reserve passively starts cutting interest rates, it will not be the beginning of the recovery of industrial demand for copper prices, but a negative sign of instability in the global economy.
Domestic consumption resilience is expected to be insufficient after the end of the off-demand season. The key to copper consumption resilience in 2023 lies in copper rods, lithium battery copper foil, and copper tubes. However, the copper tube industry will face cooling pressure in 2024, and the overall consumption resilience is expected to weaken. In addition, the domestic resumption of work after the Spring Festival holiday in 2024 will be weak, the characteristics of the off-season are clear, and the accumulation slope of copper is far higher than the historical level in the same period. It is expected that the downstream consumption recovery will be limited after the end of the off-season in the first quarter.
In terms of operation, in the absence of violent market conditions, investors can optimize product allocation and consider going long the oil-to-copper ratio or the gold-to-copper ratio.
