1. What factors are driving the current round of copper volatility

Duan Shaofu, director of the heavy metals department at the Non-ferrous metal, said China's economy was outperforming the rest of the world and its economic indicators continued to improve. China's gross domestic product will exceed 100 trillion yuan in 2020, up 2.3 percent from the previous year, according to the National Bureau of Statistics of the People's Republic of China. This means that China's economic strength, scientific and technological strength, the Comprehensive National Power has jumped to a new big stage, this year is planned to grow by more than 6% . At the same time, the number of new cases of new crown pneumonia in the world is gradually decreasing, the development and promotion of vaccines in various countries are accelerating, and the market's expectation of economic recovery is increasing. On the fundamentals of supply and demand, according to the full-year copper production data released by the World Bureau of Metals Statistics (WBMS) on February 17th, global copper production in mines was 20.79 m tonnes in 2020, flat compared with 2019. Global refined copper production was 23.94 million tonnes, up 2 per cent on the same period last year, while global demand was 25.33 million tonnes, up 6.1 per cent on the same period last year. The global copper market is expected to be short of 1.391 m tonnes, almost 1m tonnes more than the 2019 gap. On inventories, inventories at the world's main metal exchanges (LME, COMEX, SHFE) stood at 207,600 tonnes at the end of 2021, down 4,358 tonnes (- 17 per cent) from the same period last year, a record low.

"In addition to these factors, the ease with which countries around the world are responding to the epidemic has led to an extraordinary amount of liquidity, and the price-driving force of capital can not be ignored. Meanwhile, further support came from the continued weakness of the dollar. In addition, China's rapid control of the epidemic, the active resumption of production, the economy and demand faster than expected recovery, also gave the capital into the copper market reason. The resonance of capital and fundamentals has driven up LME copper prices quickly and sharply,"said he Xiaohui, a senior expert at Beijing Antaike Information Co. , Ltd. .

Cheng Xiaoyong, director of the POSǒNG 見 Boseong Institute of Futures Finance, believes that price volatility is the result of the resonance of financial and commodity attributes. He said that in terms of financial attributes, in 2020, in order to hedge the impact of the epidemic on the economy, overseas advanced economies such as the US have introduced unprecedented stimulus measures, including unlimited QE and large-scale fiscal stimulus programmes, as well as direct subsidies to residents, leading to a flood of global liquidity and continued inflation in the prices of risky assets. In addition, huge liquidity combined with concerns about supply chain shocks, global inflation expectations continued to climb, which led to investment demand for copper climbing. Domestic through a large-scale increase in special debt, monetary easing and other means of hedging downward pressure on the economy, resulting in domestic interest rates continued to fall

"In fact, as early as 2012, after the global economic slowdown, China began the 'supply-side structural reform' in 2016 due to the large overstocking of industrial goods caused by the decline in exports. However, with the outbreak of the new coronavirus pneumonia in 2020, downstream consumption rebounded sharply. The backward production capacity eliminated by the earlier supply-side structural reform has not been replaced by new production capacity for the time being. To some extent, the destocking rate in the second half of 2020 has also aggravated the destocking rate and strengthened this round of price rise. After April 2020, consumption began to recover as a series of measures to combat the epidemic began to bear fruit. However, another problem was found at this time. As the overseas epidemic was still spreading, global logistics transportation could not be resumed. Finally, some domestic varieties with a high degree of dependence on the outside world became more and more tight in supply because of the gradual depletion of stocks. For copper, more than 50% of global consumption is concentrated in China, but China's dependence on copper is as high as 85% . On the supply and demand side, due to the sudden outbreak of the new crown pneumonia epidemic, global mining production is reduced, the logistics industry is interrupted, and copper supply is in short supply. However, with the effective implementation of a series of anti-epidemic measures in China and the full-scale promotion of resuming production, the market demand gradually increased, which also led to a rapid decline in inventories, corresponding to the rapid rise in prices Color Research Director Chen Sijie said.

There are two reasons for the sharp drop in copper prices in March. One is that the rise in US bond yields has led to the revaluation of overvalued asset prices, and the speculative nature has cooled to a certain extent Second, the rise in copper prices after the Spring Festival is not driven by domestic demand, copper prices a little too much deviation from the fundamentals of supply and demand.

2. What is the impact of price increases on industrial chains

According to Duan Shaofu, from the point of view of industrial chain, the economic benefit of mine is obviously improved and the enthusiasm of mine development is increased. According to the National Bureau of Statistics of the People's Republic of China's preliminary statistics, the copper mine realized a profit of 7.3 billion yuan in 2020, up 29.58 percent year on year, with a sales margin of 15.32 percent, the price fluctuation is not helpful to the enterprise profit, the cost rises obviously, and the copper consumption is restrained obviously. For example, in the cost composition of copper wire and cable production enterprises, copper raw material accounts for more than 80% of the total cost, and the cost of copper used in air conditioning and refrigeration industry accounts for about 20% to 30% of the total cost of raw materials, it should be said that the high volatility of copper prices on the lower consumption of obvious restraint (from the stock change at the end of February SHFE stocks 148,000 tons, LME stocks 76,000 tons, COMEX warehouse 69,600 tons, three stocks total 293,600 tons) . In terms of smelting and processing profit, copper smelting realized a profit of 14.68 billion yuan, up 0.7 percent year-on-year, with a sales profit margin of 1.68 percent; copper processing realized a profit of 18.855 billion yuan, up 6.38 percent year-on-year, with a sales profit margin of 1.75 percent.

Cheng Xiaoyong thinks, copper price violent fluctuation brings adverse effect to upper, middle and lower reaches enterprise, what bring on the whole is occupy capital proportion to climb up, profit of middle and lower reaches enterprise is compressed and demand of lower reaches terminal is depressed gradually.

From the upstream point of view, the short-term rise in copper prices is a positive effect, because copper ore prices minus the price of processing fees, corporate sales profits continue to climb. However, the current global copper processing costs are low, and the increase in copper prices has not benefited middle-class smelters. In the long run, this may lead to industrial imbalances, downstream production cuts or bankruptcy of small enterprises, it is disadvantageous to the stability of long-term production and marketing of copper mine and the development of Industry Ecology.

From the middle reaches of smelting industry, the profit and loss of enterprises and copper concentrate processing costs, mining and smelters between the distribution coefficient and regional water changes. For Chinese smelters, the dependence of raw materials on foreign countries is high, the processing cost of copper concentrate is low and the waste copper needs to be imported in large quantities, which leads to the increase of actual operating pressure of domestic smelters. On the one hand, copper mines have not shared in the gains from rising copper prices; on the other hand, the cost of purchasing copper concentrates has risen and accounts receivable from downstream companies such as copper processing have increased. The only positive is that, with the copper price rise, renewable copper and other raw material supply, some of the copper as the main raw material smelting enterprise operating rate increase.

For Copper Processing Enterprises, the initial rise in copper prices corresponding to demand growth, then processing costs will increase the earnings of enterprises. However, as copper prices rose to a nearly 9-year high, demand was significantly depressed, processing costs fell, copper processing orders began to decline, copper prices did not bring much help to the business.

For end-use Copper Enterprises, some industries can raise prices to consumers to pass on the upward pressure on costs, but some industries lack the right to speak, it is difficult to raise prices. Household appliances, for example, have been raising prices since copper prices rose last year because of strong export demand and consumers'lack of say. But the wire and cable industry in the majority of private enterprises, downstream state-owned enterprises, such as state-owned enterprises, cable enterprises bargaining power is not strong, mostly based on sales and production, it is difficult to transfer cost pressure downstream. Therefore, the terminal use of copper enterprises operating pressure is very large, often appear order climbing but appear loss situation. In addition, companies like home appliances are unlikely to raise prices indefinitely, which is not a long term solution. Right now, the service sector is lagging behind manufacturing, and disposable income growth is still slower than the economy, so affordability is limited.

"From the supply and demand side, the outbreak led to the contraction of overseas copper production in 2020, and China, as the world's largest copper consumer, was the first to control the outbreak and resume normal production. As a result, the polarization of the outbreak at home and abroad has resulted in a phased mismatch between supply and demand in the copper market and low global dominant inventories, " said Liu Chongna, a copper researcher at Fangzheng medium-term Futures, speaking to reporters, "At present, overseas copper mines have basically resumed normal production, and there are more new investment and expansion projects in the 2021. The production of Peru's 2021 is expected to increase by 350,000 tons to 2.5 million tons, and global production of copper by 1.2 million tons, and the new production capacity will be released mainly in the second half of the year. On the demand side, the domestic auto and home appliance sectors will do well under the policy support and low base this year."

"On the positive side, the rise in copper prices has brought direct benefits to mine production and operation, " Ma said. The normal production mine management condition improves obviously, the profit increases greatly, the resources endowment is not good, the output drops gradually the old mine management pressure obtains the alleviation. The enthusiasm of mine production and construction is generally high. From the aspect of worry, at present, the copper smelting processing fee is at a low level, the smelting overall profit level is not high, on the contrary, the high copper price makes the copper smelting and the copper processing raw material purchase cost high, the capital occupation cost high, the enterprise management risk increases. At the same time, because of the rapid rise in copper prices, the pressure is transmitted downstream, suppressing the demand in the downstream market, causing the market to focus on 'alternatives' , which has a profound impact on the development of the copper industry. "

The price fluctuation has a relatively large impact on the downstream processing enterprises of copper. The market price has a greater impact on the processing enterprises than the upstream enterprises. First, during the period when the copper price is more stable, the large fluctuation of copper price in the short term leads to the imbalance of customers'demand and orders, which affects the business processes of receiving orders, scheduling production and shipping Second, copper price fluctuation puts forward higher requirements for corporate fund management, requiring more accurate fund forecasting and more reasonable financing channel support; third, in the short term, customers'digestion of high-priced inventory needs a certain process, if the copper price fluctuates sharply for a long time, it may cause the downstream demand to be affected periodically. In the long run, copper consumption will continue to grow, thanks to booming industries such as new energy.

3.How to deal with the fluctuation of price

"It is understood that at present, enterprises mainly use hedging to avoid the business risks brought about by large price fluctuations. The proportion of large state-owned enterprises using hedging is 100% . Downstream processing enterprises use order-based production, timely communication and coordination with end-users when prices fluctuate substantially. At present, there are few cases of customers defaulting on contracts, " Duan said, in the current situation, enterprises should take corresponding measures according to their own circumstances to reduce the impact of price fluctuations on enterprises.

How will the copper market move in the future? Although the current round of copper price increase is supported by fundamentals, under the circumstances that the global currency is overissued and liquidity is exceptionally abundant, the price increase speed and rate of increase are too fast and too large, and a price correction is inevitable, prices will return to normal levels in the future.

Duan said that in the short term, supply and demand fundamentals are still developing in a positive direction. At present, the overseas economy is in the early stage of resuming production and overseas copper demand will pick up further. China's economy has entered a new stage of development and is accelerating the construction of a new development pattern with the domestic big cycle as the main body and the domestic and international double cycle promoting each other. In particular, at last year's Central Economic Work Conference, it was proposed that "we should seize supply-side structural reform, pay attention to demand-side reform, and form a higher level of Dynamic equilibrium where demand pulls supply and supply creates demand" , it is a new viewpoint and thought based on the change of market demand in recent years, which will have a far-reaching influence on the future economic pattern.

In the medium to long term, the current market for copper demand in new areas estimated too optimistic. In particular, the new energy vehicles, carbon-neutral, Carbon Peak, emerging urbanization and other areas of demand estimation is based on a series of assumptions made, there may be a large deviation. At the same time, some estimates do not take into account the decline in copper consumption in traditional sectors. Copper prices rose sharply, copper mine profits skyrocketed, or will further stimulate the release of mine capacity. Therefore, under the situation that the global epidemic situation has been controlled step by step, the high copper price will further stimulate the enthusiasm of mine investment and development. The mismatch between supply and demand is expected to improve, but it does not rule out strikes over prices at overseas mines.

He Xiaohui believes that in the near future, copper prices may still have another upward trend after the adjustment, mainly because the domestic economy and demand in the first half of the year are still expected to show better data. Overseas, with the advance of vaccines, the economy and demand will continue to recover. Today's adjustment to re-entry opportunities, after the market will gradually enter the traditional consumption season, in various conditions are still expected to be more favorable background, copper prices are likely to go higher again.

Sentence is too long, please supply a shorter sentence. In addition, high copper prices will stimulate some supply to be released quickly or ahead of schedule, which will suppress the upward trend of prices, while carbon peak and carbon neutral related demand for copper will have a long-term driving effect,"he added.

In the longer term, he Xiaohui believes that the future pattern of large copper prices is expected to be supported by inflation at a relatively high level. However, there are still some disturbing factors. Therefore, he believes that on the whole, the future trend of copper prices will be a process of returning to a relatively reasonable range from the irrational rally and height driven by hot money in 2021.

Chen Sijie shares the same view. He said that at the macro level, with the emergence and popularization of vaccines, monetary policy will return to normal in a special period sooner or later. At present, worries about rising interest rates are still brewing around the world, the US dollar also began to stabilize. As the economy continued to recover, the market became more and more worried about the early arrival of the liquidity turning point. However, as things stand, central Banks in major economies are unlikely to change monetary policy immediately in the second quarter, so liquidity will not, if not increase, at least not in the short term. At the micro level, the fundamentals of copper are still relatively healthy, the epidemic in South America is still not well controlled, the supply of copper in the short term is limited, and domestic processing costs have continued to fall to an all-time low of $34 per ton, smelter profits have been squeezed, leading to strong expectations of a second-quarter smelter production cut and limited short-term increases in imports of scrap copper as the policy has just hit the ground. The second quarter of the consumer end is the traditional peak season for industrial products. With the current overall inventory level, it is still at a relatively low level in history. The second quarter will still be very tight, and there may even be a risk of spot squeeze. This low inventory, high price pattern of probability will continue, continue to good copper prices.

Cheng Xiaoyong believes that the current high copper price will usher in more potential negative factors, the most obvious is that the high copper price depresses the downstream demand. For the wire and cable industry, where private enterprises account for the majority, it is difficult to pass on the cost pressure to state-owned enterprises such as the State Grid. Only the enameled wire consumption is better. For household electrical appliance enterprises, the copper price increase can pass on the cost pressure to consumers in the short term, but it is difficult to sustain in the long term.

Standing at the current time node, we can see that China's copper industry chain still has problems such as inadequate protection of mineral resources, copper price fluctuations put forward higher requirements for enterprise management and objectively promote the survival of the fittest. Under the background of copper price fluctuation, industrial enterprises should maintain strategic focus, strengthen risk control, cultivate internal competence, continuously improve management ability and core competitiveness, and promote the transformation and upgrading of traditional industries

Throughout the copper industry, expectations of easing at the mine have been raised, but the 2021 Benchmark continues to slide, raising fresh concerns about 2021's tight supply. Scrap copper approval system was abolished, scrap copper industry upgrading and transfer is also taking place. The production capacity of electrolytic copper in China is still in a period of rapid expansion, and the mismatch between the growth rate of ore end and smelting will have a far-reaching impact on copper smelting and downstream deep processing industries. The battle between a faster recovery in the 2021 overseas economy, rising consumption and deflationary concerns as the economy recovers will lead to 2021 in China's copper market and how copper prices are changing:. .. 

Source: Non-ferrous metal

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