Preface

In 2021, bulk commodities have seen a magnificent market in the context of high global inflation. Thanks to the ultra-loose monetary policy of the world, especially the Federal Reserve, major economies have resonated and recovered, and commodities have obtained the best opportunity to rise. After the sharp rise in the first half of the year, the price of copper oscillated in the high range for half a year, with several slight upward rushes but it was difficult. Break through the pressure level. Looking forward to next year, perhaps the general direction has changed. In the post-COVID-19 period, liquidity has begun to tighten, and copper prices will continue to be under pressure.

Review of copper prices in 2021

Copper prices performed strongly in the first quarter. Shanghai copper once broke through the 70,000 mark. After experiencing a violent rise in February, domestic and foreign copper prices peaked and fell at the end of February and started a new round of volatility in early March. We believe that the huge increase in copper prices is mainly due to macro factors, accelerated vaccination, recovery + inflation fermentation, coupled with the “carbon neutral” demand logic, market sentiment has been ignited. But then the emergence of unfavorable factors dispelled the enthusiasm of the bulls. In April, the United States proposed an infrastructure bill, superimposed on the initial value of the European and American manufacturing PMI, which rose more than expected, and soared. Lun Copper once hit a record high of 10,747.5 US dollars. However, relevant domestic institutions began to intervene intensively and gradually upgraded from oral intervention to actual action. In mid-June, the State Reserve planned to sell copper, and the price of copper continued to fall. The price of copper did not stop falling and rebound until the reserve was confirmed. In the fourth quarter, copper prices continued to fluctuate in a narrow range. The main reason was suppressed by macro factors. Under the expectations of the Fed’s Taper and weak domestic economic data, copper was used as a macro variety for short allocation; the main supporting factor was inventory, especially the continued inventory of the Shanghai Futures Exchange. The decline has given support to copper prices. During this period, there was a short and rapid rise. The LME canceled warehouse receipts and high premiums were the main driving forces. However, after the intervention of the exchange, the copper price returned to the shock range.

In the spot market, the overall spot market in 2021 was strong, and it was at a premium for most of the time. In the second half of the year, the spot maintained a longer premium, mainly due to the low domestic inventory. The trend of spot premiums and discounts is more in line with seasonal characteristics and also in line with historical laws. Specifically, in the first three years shown on the chart, after eliminating the extreme value of 2019, the average price of premium and discount for the whole year has been operating within a narrow range of [-200,200]. But entering 2021, the historical extreme low inventory has also given birth to a different premium pattern. In the first half of the year, the operating range was [-240,175], with an average value of -28. From the second half of the year to the present, the operating range [-70, 2250], with an average value of 298, continued to be at a premium in the third and fourth quarters. The extreme price was due to the tight import value-added tax invoices.

Who stirs my heartstrings?

The growth of raw materials can be expected, but the disturbance is still

In terms of copper mines, stock mines did not contribute a significant increase in this year. According to our statistics, the output of major global mining companies in the first three quarters was almost the same as last year. The contribution of the increase was mainly from Freeport, First Quantum and Zijin mining. Freeport started to increase volume because of Grasberg’s underground project, First Quantum because of the start of the Cobre Panama expansion project, and Zijin Mining because of the official start of new projects such as Kamoa-KaKula.

From the perspective of raw materials, how to increase cyclical supply after the epidemic is the core issue. The underlying driver is high profit stimulus, and the underlying constraint is the disturbance at the end of the epidemic. The global copper mines seem to have entered a recovery cycle, but the market still has a lot of expectations for the flexibility and pace of recovery. Scrap and blister copper have also been infested in this round of the epidemic, and how to recover in the future is also worth pondering. In addition, the risk of changes in the relevant policies of copper mines and copper scrap producing countries has also added a bit of supply uncertainty.

Mesoscopic observation: Chile’s copper mine output from January to October fell 2.2% year-on-year to 4.64 million metal tons. The annual forecast is 5.62 million metal tons, which is a marginal decrease of nearly 110,000 metal tons from 2020. Peru’s copper mine production from January to October increased by 10% year-on-year to 1.89 million metal tons. The annual forecast is 2.32 million metal tons, a marginal increase of 175,000 metal tons.

The epidemic has caused disturbances to the top two producing countries in the world, but direct disturbances in Peru are more reflected in 2020, and indirect disturbances in Chile are more reflected in 2021. At the bottom of the drive, earnings have already given enough stimulus, and marginal changes will be more affected by the epidemic control. Under the assumption of gradual control of the epidemic, the space for stock restoration in Chile and Peru in 2022 is expected to be more than 300,000 metal tons.

It is worth noting that, contrary to “common sense”, in the early stage of profit contraction caused by the fall in copper prices, mines often choose to release more volume to hedge against the fall in prices in order to maintain profit growth. This will instead be beneficial to the release of production capacity. From the perspective of policy risk, the market is worried about major adjustments in Chile and Peru’s mining policies, mainly taxation. In the short term, even if the policy is adjusted, mining investment and development will be more affected, and the impact on the stock will be relatively small.

Zambia’s copper mine output is expected to drop to 800,000 metal tons in 2021, while Congo (DRC) is expected to increase in counter-interference. The annual output is expected to reach over 1.67 million metal tons. Stimulate. As the Congo (DRC) will still have new production capacity and ramp up next year, and under the assumption that the epidemic is controllable and weakened, Zambia’s production will resume production in stages, and the marginal elastic growth space may reach 280,000 metal tons in 2022 (Congo 20+, Zambia 8+).

Affected by the epidemic is relatively weak, and in the new production capacity and ramp-up cycle, China’s copper mine output in 2021 is expected to increase by 7% to 1.79 million metal tons, taking into account the high profit stimulus and the commissioning and ramp-up of Yulong, Qilong and other projects. It is conservatively estimated that China’s copper mine output will continue to grow by nearly 7% to 1.91 million metal tons in 2022. Other regions have been affected by the epidemic and accidents to varying degrees, including the United States, Australia, Canada and other regions. The inventory repair space next year is expected to exceed 40,000 metal tons.

From the perspective of mesoscopic observation, the above preliminary estimates are superimposed on the new production capacity in Indonesia, Peru, Serbia and other regions. It is optimistically estimated in 2022 that the global copper mine production increase may reach 1.15 million metal tons, considering the project launch is less than expected and other disturbance risks , It is conservatively estimated that the global copper mine production growth should be above 900,000 metal tons.

At this stage, the Las Bambas copper mine has a risk of shutdown. In the most pessimistic case, the annual shutdown will bring about a marginal reduction of about 300,000 metal tons, and the global copper mine output should increase by more than 600,000 metal tons. In fact, Las Bambas copper It is unlikely that the mine will be shut down for a long time.

Micro observation: In 2021, the potential loss of global copper mine inventory projects caused by the epidemic and other disturbances is about 400,000 to 450,000 metal tons. Under the assumption of optimistic control of the epidemic, even if a certain stock recovery is not as expected, the marginal growth should be 320,000 metal tons. above.

From the perspective of new production capacity and ramp-up, the projects that will be launched in 2022 with high probability include: Teck’s QB2, Zijin’s 2 projects (China Qilong, Kamoa Phase 1 2 series), Anglo American Resources Quellaveco, Iran National Copper 3 projects, Chinalco’s Toromocho production expansion project, etc., referring to its normal production rhythm, the marginal output growth is expected to be more than 530,000 metal tons.

Climbing production projects include: Zijin Kamoa Phase I 1 sequence, Zijin Serbia Timok, Freeport’s Grasberg project, etc., under normal circumstances, the marginal output will increase by 265,000 metal tons. On the whole, the marginal growth of new production capacity and ramping production under normal circumstances will bring about 795,000 metal tons.

In terms of microscopic observations, it is optimistically estimated that the marginal growth of global copper mine production in 2022 will be around 1.195 million metal tons. Considering the risk of stock recovery and new production capacity being put into production or production climbing less than expected, it is conservatively estimated that the annual growth should also be 950,000 metal. More than tons. The conservative estimates obtained from micro observations (statistics from the company’s perspective) and meso observations (statistics from the perspective of the main country of production) are relatively close, and theoretically micro observations cover a wider sample. If you consider the shutdown of the Las Bambas copper mine under extreme circumstances, the marginal increase should also be more than 650,000 metal tons. Micro observation: In 2021, the potential loss of global copper mine inventory projects caused by the epidemic and other disturbances is about 400,000 to 450,000 metal tons. Under the assumption of optimistic control of the epidemic, even if a certain stock recovery is not as expected, the marginal growth should be 320,000 metal tons. above.

From the perspective of new production capacity and ramp-up, the projects that will be launched in 2022 with high probability include: Teck’s QB2, Zijin’s 2 projects (China Qilong, Kamoa Phase 1 2 series), Anglo American Resources Quellaveco, Iran National Copper 3 projects, Chinalco’s Toromocho production expansion project, etc., referring to its normal production rhythm, the marginal output growth is expected to be more than 530,000 metal tons.

Climbing production projects include: Zijin Kamoa Phase I 1 sequence, Zijin Serbia Timok, Freeport’s Grasberg project, etc., under normal circumstances, the marginal output will increase by 265,000 metal tons. On the whole, the marginal growth of new production capacity and ramping production under normal circumstances will bring about 795,000 metal tons.

In terms of microscopic observations, it is optimistically estimated that the marginal growth of global copper mine production in 2022 will be around 1.195 million metal tons. Considering the risk of stock recovery and new production capacity being put into production or production climbing less than expected, it is conservatively estimated that the annual growth should also be 950,000 metal. More than tons. The conservative estimates obtained from micro observations (statistics from the company’s perspective) and meso observations (statistics from the perspective of the main country of production) are relatively close, and in theory the micro observations cover a wider sample. If you consider the shutdown of the Las Bambas copper mine under extreme circumstances, the marginal increase should also be more than 650,000 metal tons.

Import side effects

As of October, the cumulative year-on-year growth rate of copper concentrate in 2021 was 6%. Compared with last year, the growth rate has rebounded, but it is still in a low position. The impact of the epidemic still exists, and the transportation problem is more difficult to solve. China’s copper smelting backbone enterprises have reached a consensus. In 2021, the total purchase of copper concentrates will decrease by 1.26 million tons, which will jointly drag down the growth of refined copper. In 2022, under the more certain situation of foreign smelter expansion, the growth rate of concentrate imports may still be relatively limited. Imports of refined copper fell sharply. The cumulative year-on-year growth rate from January to October 2021 was -28%. The import window was closed most of the time, transportation problems, the State Reserve’s dumping of copper, and domestic production remained stable, combined with the high base in 2020. The year-on-year decline in refined copper imports in 2021 is very significant, and the growth rate is expected to pick up in 2022. The import of blister copper fell slightly, and the processing fee for blister copper has experienced a rise and fall, indicating that the supply of blister copper has become tight, but the reason is also the transportation problem. Zambia is China’s largest importer of blister copper, but it is a landlocked country and needs to be approved. The port of Durban exported copper overseas, and riots broke out in South Africa, and the port of Durban was congested. As a result, my country’s blister copper imports decreased. However, it is generally considered to be a temporary shortage and is expected to be repaired next year.

Let me focus on copper scrap. Imports of scrap copper have increased sharply this year, reversing the continuous decline in copper scrap imports over the past three years. From January to October 2021, the cumulative growth rate of the physical volume from January to October 2021 is as high as 86% year-on-year, and the metal tons increased by 91% year-on-year. An increase of 520,000 metal tons. Since November 1st last year, the 0% temporary import tariff rate for copper scrap will be applied. Pre-shipment inspection is no longer required, import approvals are no longer required, and import ports are no longer restricted. Affected by this, copper scrap imports will increase significantly in 2021. However, looking at the price difference of refined scrap, the supply of scrap copper is tight, especially in the second half of the year. The main driving force for the growth of domestic electrolytic copper production this year is still the increase in the supply of copper concentrate, but the smelting of recycled copper raw materials is the most marginal change. In general, the production capacity of scrap copper rods can only be opened by half, and there are often shortages every year. In 2021, it will be basically tight for the whole year, especially in the third and fourth quarters.

The global pattern of copper scrap is like this. Asia is a net import region, Europe and the United States are a net export region, China accounts for the largest proportion of Asian imports, and Southeast Asia is a transit point. Therefore, China’s net imports in 2022 will still be determined by the supply and demand of overseas copper scrap market and inventory, and overseas supply will be determined by the supply of European and American origin. The direct utilization rate of copper scrap in developed countries such as Europe, the United States and Japan is as high as 60% -70%, so the export volume available in Europe and the United States is also limited. In 2019, Europe and the Americas have net exports of about 1.43 million tons of copper scrap. Below this data, Malaysia’s original plan to implement the scrap metal import tightening policy in November is postponed until next year. According to EU news, the EU revised the EU solid waste transportation regulations in November to restrict the export of solid waste, and local companies in Europe and the United States resume work. In 2022, the available export volume will still decline, and the export volume is expected to be around 1.2 million metal tons. Domestically, data from the Recycling Metal Branch of China Nonferrous Metals Industry Association shows that if the average recovery period of copper scrap is 15-20 years, the amount of scrap and recycling of copper resources in my country has entered a rising period, and it is expected that scrap copper will be recycled in 2022. In 2022, the domestic supply of copper scrap will be 3.75 million metal tons. In terms of demand for copper scrap, the smelting process requires about 1.8 million tons. SMM has calculated that the production capacity of scrap copper rods is 6 million tons, which is based on a 50% operating rate. , It needs to consume 3 million tons of copper scrap, in addition to the consumption of brass rod production capacity, the supply is insufficient, so we expect the supply of copper scrap in 2022 will still be tight.

The gap between supply and demand is closed on the road, and the economic drive weakens

The overseas economy has suffered severe supply shocks this year, and the closure of the supply-demand gap was once blocked. However, judging from the current supply-demand repair and inventory repair of major overseas economies, the supply-demand gap has returned to a gradual closing trajectory, and it is likely to be close to completion in 2022. The economic drive is expected to weaken. Among them, the US supply and demand gap is gradually closing, and it is expected that the economy will still be supported next year. However, due to the limited space for further repairs and the weakening of the support margin, the supply and demand gap is expected to close next year under optimistic circumstances. The supply and demand gap in Europe is currently worse for repairs, and there may be more room for repair next year. The replenishment cycle may have a stronger driving force for the economy than the United States.

An anchor that is hard to ignore-the irresistible rise of inflation

Since the epidemic, the Fed’s monetary policy anchor has given priority to locking in employment, but as the economy has repaired the unemployment rate has continued to fall. Although the labor participation rate has not been restored to the pre-epidemic level, soaring inflation has frequently put pressure on policy decisions, and public speech has had to turn to Hawks. Why has inflation turned to be an important basis for current decision-making? We believe that various reasons may make it difficult for inflation to adhere to the “temporary theory.”

First of all, from the perspective of its composition, the year-on-year increase in commodity prices (excluding food and energy) far exceeds historical levels, approaching an extreme value of 10% in a single month. Behind the sharp rise in commodity prices is the historical gap between supply and demand in the United States this year. High position. With the continuous repair of the global supply chain and the improvement of logistics efficiency, the gap has gradually closed, and commodity prices lack the motivation to further increase significantly. However, it is expected that the closing of the gap will take a certain amount of time, and high and fluctuating commodity prices have a certain degree of support for inflation.

Secondly, the prices of services (excluding energy) are currently restored to their pre-epidemic levels, but they still have the potential to rise, which is also an important factor for inflation that is not “temporary”. The decline in the labor participation rate will make it difficult for the labor gap to return to the pre-epidemic level, and wages will continue to increase labor costs. The transmission of housing prices to housing rents also takes time, which is about one and a half years ahead. From the perspective of both operations, future rent increases will continue to push up service price inflation. Moreover, the re-eruption of the staged epidemic will also have a negative impact on service consumption, and there is still room for service consumption to repair itself. Therefore, service prices will continue to maintain inflation at a high level after commodity prices.

On the whole, due to misjudgment that inflation will gradually decline due to the closing of the supply and demand gap, the U.S. monetary policy has not been able to tighten marginally. However, after gradually realizing that inflation is not temporary, the policy attitude in the short and medium term may not be the same as before. Regardless of the long-term debt repayment pressure, whether the United States can implement the tightening strategy as it is, or it will continue to be overwhelming. The urgency of tightening the liquidity margin in the short to medium term is sufficient.

What kind of interest rate hike expectations are being reflected by the market?

The market expects that the Fed will enter an interest rate hike cycle after the end of Taper in March next year. The current market benchmark assumes that it will raise interest rates 2-3 times in March, June and December next year. The UK may raise interest rates sooner, possibly as early as January next year. Due to the British eagle’s remarks, the market generally expects the UK to raise interest rates for the first time around January next year at the earliest. In the bond market, the 10-year government bond yield of the United Kingdom is significantly steeper than that of Europe and the United States, which fully reflects market expectations. Although the EU’s economic recovery is not ideal, the policy easing range may be narrowed under high inflation pressure. Although the European Union has slowed economic recovery due to repeated epidemics, and weakened inventory cycle replenishment, which is less than expected, European inflationary pressures are high, and policy margins are expected to be tightened.

Labor shortage, poor logistics, etc. have hindered supply repair

First, the long delivery cycle due to poor logistics has led to industry replenishment that fell short of expectations. At present, shipping congestion is still obvious, and container prices are high, which is mainly related to the substantial increase in trade volume between China and the United States and China and Europe. China’s epidemic control is effective. In contrast, the industrial chains of other important manufacturing countries represented by Southeast Asian countries have not recovered. Therefore, the dependence of Europe and the United States on China has increased significantly, resulting in congestion of China-US and China-Europe routes, and imbalances in container transportation, often appearing The situation where there is no goods on the return journey.

Second, labor shortages have delayed normal inventory replenishment. The U.S. job market currently has a high vacancy rate. On the one hand, the repeated epidemics have caused the labor population to worry about health problems, with low educational qualifications and higher contact-type job vacancies. In the non-agricultural employment data in November, the number of new non-agricultural employment in service production in the private sector was significantly lower than the normal level, which is an important proof. On the other hand, the previous cash financial subsidies are not conducive to the return of the unemployed to work, and the motivation to return to work is limited.

In addition, by category, the production restrictions of automobiles have dragged down the supply and repair. Under the influence of chips, US automobile production is lower than normal, which also reflects the vulnerability implied by the long supply chain. According to US BEA estimates, US automobile production in October still fell by nearly 40% year-on-year. However, as the chip inventory rebounds, the chip shortage may ease marginally, and car production is expected to rebound in the future.

How about the inventory, will copper prices continue to rise in 2021 in the future?

As of December 10, LME copper stocks were 82,000 tons, a decrease of 26,000 tons from the end of last year; Shanghai Futures Exchange stocks were 41,000 tons, a decrease of 45,000 tons from the end of last year; COMEX stocks were 58,000 short tons, a decrease of 19,000 from the end of last year. Short tons. The bonded area inventory was 137,000 tons, a decrease of 310,000 tons from the end of last year. The three places plus the bonded area inventory was 318,000 tons, a decrease of 400,000 tons compared with the end of last year. It can be seen that the explicit inventory and the invisible inventory have been in a historically low position. , Mainly the result of a mismatch between supply and demand. Insufficient long-term capital investment, under the influence of the epidemic, short-term supply rigidity, linear supply recovery gradually, but demand is a stepwise growth, recovery is slower than demand, and inventory has fallen sharply.

It can be seen that the inventory in the first half of the year was still high, mainly due to the high copper price in the first half of the year, which was difficult for downstream terminals to digest, and demand in the peak season was delayed. After entering the second half of the year, global inventories have seen a rapid decline and have now fallen to the lowest level in recent years. On the one hand, demand is resilient, on the other hand, the tight supply of scrap copper has also increased the consumption of refined copper. At present, it has entered the inventory accumulation cycle in previous years, but there is still no turning point in inventory. It is necessary to pay attention to when the negative feedback from downstream to upstream will be reflected in inventory. If consumption improves more than expected, the future may maintain a low inventory trend.

Supply and demand balance and conclusion

In summary, liquidity may ebb, and interest rate hike expectations are heating up, and the Fed’s Taper acceleration + rate hike may be a relatively certain thing. Inflation expectations may weaken, depending on the timing of inventory replenishment. The domestic policy shift is basically confirmed, the credit policy may take precedence over the currency, and the countercyclical sector will provide economic support. In terms of supply and demand, it may turn into a surplus in 2022, and the extent of surplus is not obvious. Copper mines may still maintain a high growth rate in 2022, and the medium and long-term copper mine supply growth rate is not optimistic; TC is adjusted slightly, smelting profits are guaranteed, and the growth rate of refined copper production accelerates; consumption in Europe and the United States may peak and fall, domestic real estate Cooling down, the increase in new energy is still limited, and the growth rate of demand has fallen. The inventory is extremely low, and the inventory turning point has not yet been seen. In terms of copper prices, the center of gravity is expected to shift downward in 2022.

risk point:

There may still be variables in the future interest rate hike path;

Stall risk in domestic real estate;

The epidemic has repeated.

Source: Shanghai KINMACHI New Material Technology Service Number “Metal Material Expert”

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