Calm down on great drop, not too pessimistic

Copper for three month delivery on LME dropped to US$ 6,762 /t on Apr 23 from US$7,600/t on April 12, down by 11%. And 3-month copper price on SHFE also fell to 48,790 yuan/t on Apr 23, the record low since Sept 2009.

From bull market to bear market?

Some banks, investors, traders and even producers are pessimistic over the market. They believe the copper market is turning from bull market to bear market. “The copper price may decline to US$5,000/t or US$4,000/t”, an anonymous trader in China said.

However, Antaike believes the bull market is not over, mainly because the fundamental are still supportive to the price, the copper prices are expected to fluctuate at relatively high level. The market participants are over-reacting to the price drop recently. Why are we not so pessimistic over market?

Economy recovers slowly and doesn’t become worse

Global economy won’t recover smoothly in 2013, and we predict the overall growth rate will be limited, however it doesn’t impose too much negative impact on copper demand, and consumption data shows market is developing towards a good way currently.

Although US economic data is mixed, there is still more good news; there are a lot of uncertainties in European economies, but its situation doesn’t become worse compared with the same period in 2012.

Despite the fact that HSBC Apr PMI was just 50.5, lower than the anticipated 51.5, but China’s PMI has stood over 50 for consecutive several months. China’s overall demand (Apr) slowed down compared with the previous month, and domestic demand was acceptable while international demand was weak. And the PMI data was still in expanding area, showing China’s economic recovery was just slowing down, so we thought the government might issue some policies to support domestic demand, and monetary policy might shift from tight in Q1 to loose in the following quarter, besides, Mr. Zhou Xiaochuan, chairman of China’s central bank claimed that China had to lower its growth rate so as to promote the structural adjustment, which was also in line with the current data.

To sum up, there were indeed some troubles in the recovery of global economy, but the troubles weren’t that huge as the 2008 financial crisis and 2010 EU debt crisis, and market just over reacted to the price fall.

Refined copper consumption is better than expected, growth rate higher than previous year

Growth rate of copper semis production is accelerated. Data released by China Nonferrous Metals Industry Association (CNIA) showed that copper semis production in Jan to March increased by 18.4% YoY to 3.08Mt, while at 2.47Mt or up by 17.3% YoY during the same period of 2012; refined copper production in Jan to Mar grew by 11.2% YoY to 1.55Mt, while at 1.29Mt or up by 8.1% YoY in Jan to Mar of 2012. So the growth rate of copper semis production was higher than refined copper in the first quarter of 2013, mirroring refined copper consumption is improving and better than that in the same period of 2012. Some Chinese copper wire rod producers showed that the order forms for copper rods in Mar and Apr increased and the processing charges was rising. The operating rate of Chinese copper fabricators in Mar and Apr was higher than that in Jan and Feb, according to the companies.

The development of copper end-using sectors is getting better. According to data from China Electricity Council, the completed power investment was 120 billion yuan in Jan-Mar of 2013. Among them, investment in power generation and grid amounted to 61.8 billion yuan and 58.2 billion yuan in the first three months of 2013, down by 17.1% or up 34.7% compared with the same period of 2012, respectively. A sharp increase of investment in power grid will give support for domestic copper consumption, because power grid is the main copper-using sector in electric power industry.

The output growth of most main copper end-using products in Jan to Feb is better than 2012. According to data from National Bureau of Statistics of China (NBS), in power industry, transformer output increased by 2.9% YoY, slightly higher than the same period of 2012; power cable output rose by 31.2% YoY, far higher than the same period of 2012. In transportation industry, autos output continued the growth trend of 2012, with the year on year growth rate of 12.4% in Jan to Feb. In air conditioning and refrigeration industry, the growth rates of household air conditioner and ice-box were 7.7 and 18.8 higher than the same period of 2012, separately, but the growth rate of household refrigerators output was lower than last year’s. Investment in rail infrastructure kept a high growth.

The data of copper end-using products in Jan to Mar has not been completely issued by NBS. The data we got showed that such industries, like autos, AC motor and air conditioner kept a stable growth. Meanwhile, the completed investment in rail infrastructure increased by 28.0% YoY to 54.51 bln yuan.

Chinese property curbs continue. NBS’s data showed that investment in national property industry reached 1313.3 billion yuan in Jan to Mar, nominal up by 20.2% YoY, obviously higher than the longstanding record of 16-18% since Apr of 2012. Sales space of residential houses was 208.98 mln sq.m. in Jan to Mar, up by 37.1% YoY. Newly started floor space of houses was 4789.50 mln sq.m in Jan to Mar, up by 17.0% YoY. Compled floor space of houses was 194.73 mln sq.m, up by 8.9% YoY. The recovery of Chinese property industry will promote demand for copper products from home appliances, bathroom and plumbing etc. industries.

Besides, some copper scrap consumers will buy refined copper instead of copper scrap when the price gap between copper scrap and refined copper is not big.

Antaike estimates that refined copper consumption will be 1.88Mt in the first quarter of 2013, up by 6.8% YoY, higher than 4.8% of 2012.

Supply growth lower than expected

Chinese raw materials for refined copper production include copper concentrates (imported included), imported blister and anode and copper scraps. According to Antaike’s estimation, Chinese refined copper production was 5.62Mt in 2012, among which, 2Mt from copper scraps. With regards to raw material sources, lifted refined copper production in 2013 will be mainly from mine copper; the imported copper blister will not change much, flat with 2012; refined copper production from copper scraps will decrease, due to copper scrap supply shortage. Copper scrap supply was getting tighter and tigher, especially after LME copper price is lower than USD 7,500 recently, which probably resulting in reduction of Chinese refined copper production. China Smelters Purchase Team (CSPT) held one conference to discuss the purchasing difficulties for copper scraps users on Apr 20 and Antaike attended. Antaike reviews that refined copper production will probably reduce in a short term and then resulting in annual production growth lower than expected. Most Chinese copper producers faced the probable reduction for refined copper production and the reasons are as follows: first, current smelting capacity has been in full swing, it is difficult to make up for the loss caused by the decrease of copper scrap supply by the way of increasing purchase of copper concentrates; second, global copper concentrates grade is generally low and the booking and shipment period will be over three months.

Antaike estimates that global copper concentrates production will grow in 2013, but the growth rate not clear in the first half of the year, because some mining projects to be commissioned in H1 2013 has been put off to H2 2013. Analyzed from the lower growth rate of Feb copper concentrate production in Chile and Peru than last year’s, production growth of copper concentrate has not been notable released.

Recent spot treatment charges for copper concentrates rose to US$ 75 and 7.5 cents from US$ 70 and 7.0 cents at the beginning of the year, not because of the increased copper concentrates supply but the shutdown of Sterlite smelter by environmental accident and the 100kt reduction of Garfield smelter by collapse in Bingham Canyon copper mine, and then resulting in the original long-term demand shifted to spot market.

According to output data of domestic major copper smelters from Antaike, domestic refined copper output in Q1 2013 was less than that in Q4 2012 as Spring Festival. Chinese major 12 refined copper producers produced 1.09Mt refined copper in Jan.-Mar. 2013, up 10.96% YoY; as domestic refining capacity and raw material supply increased, domestic refined copper output in Q1 is expected to be 1.46Mt, down 80kt QoQ but up 11.4% YoY; however in Q1 2013, domestic refined copper import was 677kt, sharply down 36.0% YoY, export up 359.6% YoY to 125kt, net import down 46.4% YoY to 552kt.

Overall, domestic refined copper supply (output + net import) in Q1 2013 dropped to 2.01Mt without considering stock factor (supply in Q4 2012 was 2.21Mt); in respect of consumption, domestic newly-added oversupply in Q1 was 130kt, sharply down from Q1 2012 but staying flat from Q4 2012.

Antaike estimates Chinese refined copper import will sharply decrease and export will surge in 2013 and domestic oversupply condition in 2013 will be better than that in 2012.

Increasing stock is the embodiment of stock transfer

By Apr. 24, LME copper inventory increased to 620kt, up 100% compared with 320kt in early 2013; recently it was reported that copper inventory in Chinese bonded areas dropped from 0.9-1Mt to 0.6-0.7Mt; SHFE copper inventory only increased by around 20kt in early 2013. Increasing copper inventory on LME and decreasing inventory in Chinese bonded areas almost balanced out. Therefore increasing LME copper inventory was the embodiment of stock transfer. In addition, it is noticeable LME cancelled warrants have dramatically increased to 168kt, which would be a potential cause of downward inventory in future.

Do not be excessively pessimistic

To sum up, as fund factor or even some individual agencies intentionally controlled the market, copper price showed a abnormal decrease recently.

Antaike thinks current condition will affect fund structure and strategy in future, thus we recommend you not judge simply and limitedly consider fundamental factor. The condition such as unilateral decrease for months in 2008 will be almost impossible.

Some foreign producers and agencies also expressed a similar view: Aurubis, the largest copper producer said copper oversupply would be lower than expectation. Sucden Financial also expressed although Chinese economic growth and manufacturing data was weaker than expectation, the data would have a big fluctuation. Chinese copper consumption prospect was more optimistic than recent GDP and manufacturing data; it was wrong for people to attribute weak copper market to oversupply, production limitation and financing agreement absolutely could control influence from oversupply, thus people who had pessimistic attitude about Chinese market was wrong, Steve Hardcastle, as director of Customer Service Department of Sucden Financial, said.