Since mid-to-late May, the guarantee of raw materials has caused downstream enterprises to fall into the dilemma of "having orders but not daring to take them on" . The decision-making departments attach great importance to it, issue policy signals guaranteeing supply, and crack down on speculative speculation, this makes the raw materials supply-side constraints have been relaxed, and lead to copper and other commodities raw materials prices set off the adjustment market. Originally, the downstream of the raw materials boom brought negative feedback effects of consumption, price adjustment pressure will appear in the third quarter, but the central policy of raw materials supply guarantee measures made this adjustment ahead of time.

Before this, the domestic and international liquidity environment has already appeared the inflection point, the inflation pressure causes China and the US central banks to increase the credit contraction strength, especially the US Federal Reserve may release the reduction QE signal ahead of schedule, this means that liquidity inflection points superimpose supply and demand to improve inflection points to form a resonance, future copper prices may be in the construction phase top. However, the domestic carbon peak, carbon-neutral policy has not changed the main tone, but adjusted the implementation rhythm, short-term compression capacity will be weakened, increased supply-side measures, which makes the supply-side constraints short-term relaxation, but the long term may persist, so the risk of a sustained plunge in copper prices is not present for the time being, and it is highly likely that a shock correction will be used to deflate the liquidity-fueled bubble.

1. Is the risk of stagflation increasing in the US? Tapering may come sooner

In April, inflation in the US climbed and the risk of stagflation in the US was high, which could mean pressure on US stocks for a long time to come. At the moment, the hottest topic in the US market is whether strong economic growth and persistent headline inflation figures are a short-term burst of massive stimulus or the start of a medium-to long-term trend. Global growth is likely to slow as it did in 2012, when policymakers withdrew fiscal and monetary policy support, creating a weak growth and low inflation environment that has raised concerns about long-term stagnation. Even if overall unemployment rises sharply, total wage costs are likely to rise. That's because most of the unemployment is concentrated in low wage groups. As policymakers push for higher growth that has brought jobs back to the US, strong aggregate demand will push unemployment down in the middle and higher sectors. The impact of the huge pressure on labor demand on wage costs will be complemented by the impact on labor supply. Against the backdrop of inflation, the US economy is not recovering as strongly as one might expect, and the risk of stagflation is creeping in. Between 1970 and 1983, the United States fell into an unprecedented period of stagflation. While production fell and unemployment increased, prices generally rose sharply instead of falling, it is a unique economic phenomenon with high inflation rate, high unemployment rate and low economic growth. Another US figure showed that the US import price index actually posted an annual rate of 10.60 per cent in April, exceeding expectations by 10.2 per cent, up from 6.9 per cent. The April import price index may have an impact on future inflation. If producers can not absorb a rise in the price of imported goods, it will eventually push up the price of the product out of the factory and into final consumption, pushing up inflation. Business survey indicators also show that the United States stagflation pressure industry is very large. The University of Michigan survey showed consumer expectations for inflation over the next year were 4.6 per cent, up 1.2 per cent from 3.4 per cent in April, and 3.1 per cent for the next five years, up 0.4 per cent from 2.7 per cent in April. One-year inflation expectations have reached their highest level in nearly a decade, according to the data, and the last time they reached that level was in the first quarter of 2011. On May 19, the Fed released the minutes of its April meeting on interest rate policy. The US economy is still "far from achieving" the Fed's twin goals of maximising employment and price stability, and substantial progress is still some way off, the minutes show. Central Bankers'forecasts for the U. S. economy are slightly better than those outlined in March, and the outlook is less at risk than in previous months. All this was reflected in a statement after the FOMC meeting in April. This suggests that the Fed will not adjust its current ultra-loose monetary policy for some time, as the "adjustment threshold" was set to "make substantial progress" towards the twin goals. However, the minutes also note that some Fed officials expect the Fed to start talking about tapering in coming meetings, and they believe that if the economy continues to move rapidly toward the FOMC's target, at some point in the next few meetings, then, it might be appropriate to start talking about adjusting the pace of asset purchases. The FOMC minutes used the word "risk" 33 times in April, compared with 17 times in March. While officials at the meeting agreed that financial risks were generally stable, some stressed that the "deferred mortgage payment plan" set up in the outbreak could mask the vulnerability of US households and businesses. Many officials acknowledge that low interest rates and highly accommodative financial conditions have been delayed and could lead to "high yield" behaviour that could adversely affect financial stability.

2. Domestic demand weaker than the month, external demand may be near the top

According to the fixed asset investment and its sub-indicators released in April, the cumulative growth rate of manufacturing investment, infrastructure investment and real estate investment decreased from the first quarter, and even some real estate indicators showed negative growth in April, this means that month-on-month weakness in domestic demand has been proved. According to the National Bureau of Statistics of the People's Republic of China, fixed asset investment (excluding rural households) totaled 14.38 trillion yuan from January to April, up 19.9 percent year on year and down 5.7 percent from the first quarter. In April, fixed asset investment (excluding rural households) fell 9.2 per cent year-on-year. In addition, private investment increased by 21% from JANUARY TO APRIL, down by 5% from the first quarter. In April, private investment fell by 7% from the same period last year. From April last year to March this year, the rebound in manufacturing investment growth was interrupted. In secondary sector of the economy, industrial investment rose 21.7 percent from a year earlier. Investment in mining increased by 13% , in manufacturing by 23.8% , down 6% from the first quarter, and in the production and supply of electricity, heating, gas and water by 14.4% . Manufacturing investment rose 14.7 per cent in April from a year earlier, down 10.4 per cent from March. Infrastructure Investment, which has played an important role in the past counter-cyclical regulation, has fallen significantly. In the tertiary sector of the economy, Infrastructure Investment (excluding electricity, heat, gas and water production and supply) rose 18.4% from a year earlier, down 11.3% from the first quarter. Infrastructure Investment (excluding electricity, heat, gas and water production and supply) grew 2.6 per cent year-on-year in April, down sharply from 22.7 per cent in March. Of course, much of the weakness in infrastructure investment has to do with a lack of momentum since the start of the fiscal year, with public revenues running at 29% in the first quarter but spending at 23% . Public expenditure in March was 0.16 per cent lower than the previous year, with a compound annual growth rate of 4.7 per cent. The pace of expenditure was also 1 per cent slower than the same period in recent years. With the PPI continuing to rebound, the government is expected to reduce pressure on steady growth, fiscal efforts in the late is limited. Real Estate Investment, which had been resilient, has also fallen, and some indicators have even shown negative year-on-year growth. From January to April, China's investment in real estate development totaled 4.024 trillion yuan, up 21.6 percent year on year and down 4 percent from the first quarter. In April, China's investment in real estate development increased 13.7 percent from a year earlier, down 1 percent from March and down 6.8 percent from the previous month. In terms of real estate investment, the growth rate of construction investment remained high year on year, but investment in installation and equipment acquisition dropped sharply year on year, and monthly even showed a negative growth. Investment in construction projects rose 12.6 per cent year-on-year in April, down 7.2 per cent from March, while investment in installation and equipment acquisition fell 15.3 per cent and 29.7 per cent respectively, the data showed. In the case of the increase in real estate control, real estate continued to implement a high turnover and price-for-volume model in April, land acquisition area fell by 15.5% year-on-year, and future real estate construction, construction and completed area will enter the downward mode successively, the future of real estate cooling trend is very clear. From January to April, the accumulated floor space under construction, construction and completion increased by 12.8% , 10.5% and 17.9% respectively, down by 15.4% , 0.7% and 5% respectively from the first quarter. New Construction, construction and floor space under construction fell 9.3 per cent, 11.6 per cent and 3.1 per cent year-on-year in April. Only property sales remain resilient, but a downward trend has taken hold. From January to April, the gross floor area of commercial housing sales rose 48.1 percent year-on-year, but fell 15.7 percent from the first quarter. Sales of commercial housing rose 19.2 per cent in April from a year earlier, nearly half the pace in March. For now, residential mortgages and down payments continue to support the property sector, temporarily making it resilient, but the boom could soon fade as residents'leverage slows. China's imports rose 43.1 per cent year-on-year in dollar terms in April, while exports rose 32.3 per cent year-on-year, according to customs data. However, from the point of view of export commodity categories, due to the easing of the epidemic in Europe and the United States, the growth rate of exports of anti-epidemic materials slowed down significantly. In April, the growth rate of textile yarn, fabrics and products, medical instruments and apparatus dropped to-16.8% and 6.6% respectively. With the base effect fading, export growth in high-tech and electromechanical products has also slowed, falling to 24.8 per cent and 30.3 per cent respectively in April and 34.9 per cent and 35.4 per cent respectively in March, with the highest growth in February, 98.2% and 146.3% respectively. In addition, exports of high-tech products and mechanical and electrical products also dropped significantly in April from their peaks in November and December last year, meaning that the supply chain is gradually recovering as the overseas epidemic is brought under control, the peak of China's export substitution may be over.

3. Copper supply and demand continue to improve

In terms of copper concentrate processing costs, overseas copper supply is recovering. As of May 19, processing fees for 25 percent of Min's copper concentrate had rebounded slightly to between $33 and $38 per ton, after falling to between $30 and $35 per ton. As of May 19,98.5 percent of the crude copper processing fee rose to 1,800 yuan ~ 2,000 yuan per ton. Since late May, China's copper consumption has gradually entered a seasonal low season of consumption, and overseas durable goods exports may be a one-off renewal, which means there is a risk of weakening domestic and external demand for copper. The structure of inventories and the LME price differential suggests a shift in global copper supply from tight to loose. The figures showed inventories climbed to about 230,000 tonnes in the week to May 14, while LME inventories fell less, with global explicit inventories rising to 408,000 tonnes. It is worth noting that LME copper has been trading at a discount to the three-month premium since January, a position where the international copper market has moved from tight supply to loose.

4. Market Research

As the risk of a US stagflation increases, Qe may come sooner. Against the backdrop of inflation, the US economy is not recovering as strongly as one might expect, and the risk of stagflation is creeping in. Between 1970 and 1983, the United States fell into an unprecedented period of stagflation. While production fell and unemployment increased, prices generally rose sharply instead of falling, it is a unique economic phenomenon with high inflation rate, high unemployment rate and low economic growth. Originally, the negative feedback effect of consumption caused by the raw material inflation will appear in the third quarter, but the central government's measures to guarantee the supply of raw materials make the adjustment ahead of time. Premier Li Keqiang chaired a meeting of the China State Council executive meeting on May 19 and deployed efforts to ensure stable commodity supply and prices so as to keep the economy running smoothly and the constraints on commodity supply weakened significantly. The growth rate of fixed asset investment dropped sharply in April, with real estate investment holding firm in the short term, but new construction, construction area and completed area generally showed negative growth in April, coupled with a year-on-year decline in land acquisition area, this means that real estate and leverage into the end of domestic demand for goods is likely to weaken in the third quarter. Since late May, China's copper consumption has gradually entered a seasonal low season of consumption, and overseas durable goods exports may be a one-off renewal, which means there is a risk of weakening domestic and external demand for copper. The structure of inventories and the LME price differential suggests a shift in global copper supply from tight to loose. 

Source:  Boseong Futures, Managing Editor: Cheng Xiaoyong