On April 2, domestic and foreign copper prices reversed the adjustment momentum once rose sharply, the subsequent rise was not sustained. At present, the copper market is facing two contradictions: The turning point of global liquidity easing and the rise of inflation, the contraction of supply and the expansion of demand which are not as expected.

From the medium-term logic, we do not see the contradictions that triggered the sharp fall in copper prices, but it is difficult to see further sharp rise of the new driving force, mainly because of the following:

First, the recent short-term rebound in copper prices has been driven by the previous short-term exchange rate of US bond yields. However, in the medium term, we believe that there is still room for us bond yields to continue to rise, so copper prices can not be judged by this again to get the financial attributes of the boost. A modest fall in US bond yields in early April may be an important reason for the staged rally in copper prices. The recent decline in US bond yields may have a lot to do with the slowdown in US bond issuance. The data shows that the U.S. Treasury now has $1.4 trillion in cash on its books. The debt ceiling requires that the balance on a TGA account be reduced to $120 billion by the end of July, which means, the next step is to spend the money you have on your account more quickly, rather than issuing a lot of debt in a short period of time. Although a second $1,900 BN stimulus package is in place, the shortfall suggests that demand for us debt issuance is small.

As of April 12, the yield on one-year TIPS, a measure of real US interest rates, was-0.64 per cent, having risen to-0.56 per cent previously, indicating a slowdown in real US interest rates after an earlier rally of more than-1 per cent. A short-term decline in the dollar has also helped copper rally, as the rally in real interest rates has slowed.

However, nominal US dollar interest rates are likely to build a long-term bottom and there is room for further upside. On the one hand, the U. S. manufacturing, services and labor markets are recovering across the board. The US manufacturing ISM purchasing managers'index rose from 60.8 to 64.7 in March, the highest reading since 1983, data showed. On the other hand, US inflation expectations have yet to cool down, and the second quarter of US inflation upward pressure. Consumer inflation expectations for the next year rose to 4.8 per cent in March and 3.1 per cent in the next three years, according to the data, both at near seven-year highs for 2014, while consumer household spending for the month is expected to grow at its fastest pace since 2014.

Second, despite the recent apparent rebound in newly confirmed cases in countries and regions such as Europe, Brazil and India, manufacturing is recovering, meaning that as long as the world does not fall into a combination of "liquidity tightening" and a cooling of inflation expectations, then a stall-out decline in copper demand is unlikely.

Third, the new pneumonia in Chile and other countries is once again serious, the blockade measures lead to copper mine supply reduction is expected to drive copper price rebound. Recently, the number of confirmed cases and hospitalizations of new coronary pneumonia in Chile have jumped to record levels. Although the government said the new blockade would not affect the mining or shipping industries, concerns about tight supplies continued to pervade the market, with copper futures prices rising to a two-week high. From the point of view of copper ore processing costs, the supply of imported copper ore has not yet recovered significantly. According to statistics, the processing cost of 25% min imported copper concentrate dropped to us $28.33/ton, which means that the import of copper concentrate is very tight, and the copper smelting enterprises are facing great pressure of loss.

Fourth, there is also no sign of a sharp rise in the demand level. The growth in the demand for new energy brought about by "Carbon Neutrality" is considered to be gradual, unlike in 2003, in 2009 China's urbanisation and industrialisation caused demand to rise so fast that supply could not keep up. From the perspective of new energy vehicles, the International Copper Industry Association shows that New Energy Vehicles Consume 2 ~ 3 times as much copper as traditional fuel vehicles, but the proportion of production and sales of new energy vehicles is still small. China will produce about 1.3661 million new-energy vehicles in 2020, accounting for only 5.4 percent of total vehicle production, according to the China Association of Automobile Manufacturers. In terms of new energy generation, the withdrawal of subsidies also means that new energy generation will enter a new phase, and the extensive high-growth model will also change. The growth in copper consumption brought about by photovoltaic and wind power will also displace part of the consumption of thermal power generation.

In the end, we think that the Biden Administration's infrastructure program will lead to a very small increase in copper consumption. On March 31st the White House unveiled the Biden Administration's detailed infrastructure plan, which includes both infrastructure and taxes. Areas that could generate copper consumption include the repair of highways, the reconstruction of bridges and the upgrading of ports and airports, at a cost of about $671 billion; the construction, maintenance and renovation of more than 2 million residential and commercial buildings; and the upgrading of the electricity grid and the laying of transmission lines. However, we calculate that the $2.3 trillion over eight years of infrastructure projects will lead to a very small increase in copper consumption, probably around 15,000 tonnes a year, and that the US will account for only 7.8 per cent of global copper consumption in 2019.

In conclusion, we believe that at present, with the U.S. economy recovering and the vaccination rate speeding up, the upward trend of U.S. bond yields will not change, this is driven both by the economic recovery and by the fall in US inflation expectations and fiscal deficit rates, and does not even rule out the possibility of an earlier monetary tightening by the Federal Reserve, which means that the financial nature of copper will gradually weaken. Commodity attributes, short-term copper supply tight copper prices continue to support, but it is difficult to exceed expectations on the demand side.

Therefore, it is difficult for the copper market to have a trend opportunity in the short term. The opportunity for investors lies in the monthly spread of Comex Copper Futures, as well as the inside and outside arbitrage opportunities of COMEX copper and the copper of the previous period. Another notable issue regarding copper trading is the change in the exchange rate of the RMB against the US dollar. Since international copper trading is mainly conducted in US dollars, how to hedge the foreign exchange risk involved is the key. The prevailing market practice is to use futures contracts to manage the risks in the copper and foreign exchange markets, with Chichang providing margin write-offs between the two markets, and COMEX copper futures traders, if they need to hedge in Renminbi, managing Foreign Exchange risk through CCHK dollar/offshore Renminbi (CNH) futures contracts offers the opportunity to save up to 50 per cent on margin and make hedging strategies more efficient. 

Source: Futures Daily

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