Recently, copper prices have been fluctuating continuously. At the end of June, copper prices once dropped to around 100,500 RMB per ton, and then rebounded somewhat, but the price operation center has moved down compared with before.

Rising Rate Hike Expectations: Copper Prices Can't Escape the Drag

Recently, the global macro market has seen a shift in focus from geopolitical risks to adjustments in monetary policy expectations. In addition, the price performance of precious metals has also had a certain impact on the rhythm of copper price movements.

Currently, the US and Iran have entered the negotiation phase, but the peace talks have hit a series of snags. First, the direct negotiations between the US and Iranian delegations in Islamabad on April 11 broke down, and then the US-Iran talks scheduled to be held in Bürgenstock, Switzerland on June 19 were cancelled. However, the market panic caused by the war has largely subsided, and the difficulty of achieving substantial progress in the US-Iran negotiations has also been taken into account by the market.

Tools from the Chicago Mercantile Exchange (CME) show that the futures market prices in a roughly 60% probability that the Federal Reserve will raise interest rates at least once this year. On May 13th, Eastern Time, the U.S. Senate officially confirmed Kevin Warsh, a former member of the Federal Reserve Board of Governors, as the Chairman of the Federal Reserve through a full chamber vote. Warsh's policy proposition is to reshape market confidence in the U.S. dollar and expectations of controllable long-term inflation through balance sheet reduction, thereby creating room for short-term interest rate cuts. The U.S.-Israel-Iran war has driven up U.S. inflation data. Coupled with the sustained resilience shown by U.S. employment data and strong performance in manufacturing data, the market's pricing of the Federal Reserve's interest rate hike expectations is more favorable than Warsh's policy propositions. In addition, the U.S. dollar index has continued to climb since mid-May, putting some pressure on copper prices.

Affected by expectations of Federal Reserve rate hikes stemming from inflation concerns, the gold market has shown weak performance. Since gold prices began a pullback in early March, they have fallen by more than 20% by the end of June. In spite of this, although the focus of copper prices has somewhat risen after May, the gold-copper ratio still exerts a certain压制 on copper prices. At present, the price-driving effect of gold purchases by central banks around the world on gold has weakened significantly. Meanwhile, market expectations for U.S. rate hikes are heating up, putting gold prices in a relatively long adjustment cycle. In the second half of the year, gold prices are unlikely to stage a strong performance and will continue to weigh on copper prices.

Deepening supply issues, price support takes shape

Affected by the tight supply of copper concentrates, the processing fees for imported copper concentrates have kept falling. The SMM processing fee for imported copper concentrates dropped all the way from -45.41 US dollars per ton at the beginning of the year, and the negative value accelerated to expand starting from March. By mid-to-late June, the processing fee for imported copper concentrates had fallen below -120 US dollars per ton.

Since the start of this year, the domestic premium of refined copper over waste copper (including tax) has fallen from a high of 6,600 RMB per ton at the beginning of the year. In mid-to-late March, panic caused by the Israel-Iran conflict led to a drop in the price of copper futures on the disk, and there was even an occasional inversion of the premium of refined copper over waste copper (including tax). Subsequently, the premium recovered, and by the end of June, the premium had basically returned to the 2,500 RMB per ton level. It is worth noting that when the premium was at a high level, the substitution of waste copper for refined copper was not effectively formed. "Reverse invoicing" compliance inspections have made the waste copper market show an obvious bill-driven transaction characteristic. There is a structural supply shortage of tax-included waste copper in various regions. The tax point of Guangdong waste copper reported by SMM has risen all the way from 7.5% at the beginning of the year to 10.5%, making the substitution of refined copper for waste copper even more difficult.

After the outbreak of the US-Israel-Iran war, sulfuric acid prices rose to a high level. Although the prices of precious metals weakened, they still remained in a high range, which stimulated the production of smelters; although the processing fees of copper concentrates continued to weaken, they did not significantly affect the production progress of smelters. According to SMM data, the operating rate of domestic smelters remained above 83.9% from January to May. Coupled with factors such as the release of production capacity of new projects, the domestic refined copper output from January to May continued to be higher than the same period of previous years.

Diverse Terminal Consumption, Promising Performance for the Automotive Sector

According to SMM data, the operating rate of domestic cable companies remained relatively stable from January to May. Except for February when the operating rate dropped to 55.8% due to the Spring Festival holiday, the operating rate of enterprises remained between 70% and 75% during the rest of the period. However, the operating situation of cable companies in the second quarter was somewhat different from that in the same period of previous years.

The production and sales within the air conditioner industry have failed to sustain the robust growth trend seen over the past two years. While seasonal characteristics remain prominent, air conditioner output, alongside both domestic and overseas sales, has contracted to varying extents. Beyond the high comparison base, factors including weaker trade-in subsidy support and sluggish demand for new supporting facilities have weighed on domestic air conditioner sales performance. Meanwhile, geopolitical tensions, trade disputes and rising cost pressures have constrained overseas sales results. Against this backdrop, the upstream copper tube sector has adopted a more prudent operational stance. Amid persistently elevated copper prices, the copper rod industry took the initiative to slow production schedules starting in April and shifted toward drawing down finished product inventories.

According to data from the China Association of Automobile Manufacturers, from January to May, China's automobile output fell 4.6% year-on-year to 12.235 million units; automobile sales dropped 4.2% year-on-year to 12.207 million units. Among them, the output of new energy vehicles increased 2.5% year-on-year to 5.841 million units; sales of new energy vehicles rose 3.5% year-on-year to 5.802 million units. Since the second quarter, the production and sales performance of new energy vehicles has been relatively positive.

The second half of the year is a growth period for automobile production and sales. Driven by the new energy sector, the production and sales of the automobile industry are expected to continue to strengthen, and it is expected to become a relatively bright consumption end among all terminal demand sectors of copper. The air conditioning industry is strongly affected by seasonal factors and will see a seasonal increase in production at the end of the year.

At present, the negative impact of geopolitical instability on the market is relatively limited, and the Federal Reserve's interest rate hike expectations have constrained copper prices.

From a fundamental perspective, the supply of overseas ore remains relatively tight, structural problems in scrap copper supply still exist, and domestic sulfuric acid exports are restricted, increasing supply pressure. On the demand side, terminal demand such as the automotive industry is expected to rebound, the consumption performance of the wire and cable industry is stable, and the copper demand of the air conditioning industry weakens seasonally, leading to differentiated changes in copper demand. Overall, copper prices will continue to fluctuate.

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