The price of copper switches from rapid rise to oscillation

After experiencing a sharp rise in February, the copper price adjusted sharply at the end of February and early March , with the highest adjustment rate reaching 8.4%. Does this mean that the copper price increase is over?

The current copper price has already reflected the financial attributes such as inflation expectations and liquidity spillovers. The upward trend of copper prices in the market outlook requires support from the supply and demand side. In particular, we must pay attention to whether the demand in the peak season of March can be fulfilled.

From the perspective of the copper market drive, with the continuous advancement of overseas vaccination, the global economic resonant recovery has turned inflation expectations into concerns about economic recovery and monetary tightening under the circumstance of easing monetary easing. The sharp rise in U.S. bond yields proves this.

However, the logic of the rise in copper prices after the Spring Festival lies in the recovery of overseas economies, and Chinese demand has actually fallen from a month-on-month basis. Therefore, after the copper price rises sharply, it needs to be adjusted. All indicators show that downstream demand after the Lantern Festival is only a moderate recovery, and the intensity is not strong enough.

Rising U.S. Treasury yields trigger asset price revaluation

Since the beginning of the year, U.S. Treasury yields have continued to rise, triggering financial market concerns. A similar situation occurred in the first quarter of 2018: Long-term U.S. Treasury interest rates rose, triggering portfolio rebalancing, and U.S. stocks experienced significant adjustments. The rise in U.S. bond yields, the anchor of global asset pricing, means that all assets in the world are facing repricing.

The impact of rising U.S. bond yields on risky assets comes from two sources:

• On the one hand, it comes from the valuation adjustment of asset prices. U.S. Treasury yields will trigger a rise in the real interest rate of the U.S. dollar, which is the opportunity cost of risky assets;
• On the other hand, it comes from changes in the liquidity of the US dollar. Once the US dollar interest rate rises and the US dollar exchange rate rises, US dollar assets will return to the United States, and non-US economies, especially emerging markets, will experience capital outflows, which will lead to a decline in investment and interrupt economic recovery.

The impact on the real economy comes from the increase in financing costs. Low interest rates are the prerequisite for the three major sectors of US residents, government, and enterprises to maintain high debts or expand their balance sheets. Once the yield of US debt rises, it means that financing costs will rise, which will affect the improvement of corporate profits and eventually interrupt the momentum of economic recovery.

The new U.S. Treasury Secretary Yellen is not worried that the premise of debt inflation is low interest rates, but rising U.S. bond yields means that this premise will be shaken.

Earlier, Yellen said that the indicator to measure debt sustainability is not the traditional debt-to-GDP ratio, but the ratio of government debt interest payments to GDP. The logic is that although the absolute level of US government debt is relatively high, the level of interest expenditure is not high in a low interest rate environment. As long as the nominal GDP growth rate is higher than the interest rate level in the future, there is no need to worry about the sustainability of government debt. .

Therefore, the rise in U.S. bond yields may be the pressure of valuation adjustments for assets that have risen too fast before, such as the technology sector in the U.S. stock market, and copper and nickel in bulk commodities. Rising interest rates and the strengthening of the U.S. dollar exchange rate are not conducive to rising prices of highly valued assets.

The increase in copper prices after the Spring Festival is not driven by China's demand

From April 2020 to February 2021, the upward driving factors for copper prices are: unprecedented global stimulus measures have led to a rebound in liquidity, China’s economy is the first to recover from the epidemic, European and American economies’ manufacturing replenishment expectations, and inflation expectations. The hype concept of new energy demand brought by investment demand, "carbon neutrality" and "carbon peaking". Among them, the increase in copper prices after the Spring Festival is not driven by domestic demand. It is mainly due to the increasing leverage of US real estate, rising inflation expectations (triggering a rise in investment demand from overseas institutions) and the demand speculation concepts brought about by "carbon neutrality" and "carbon peaking".

From the perspective of supply and demand, after the Spring Festival, China’s domestic copper inventory rebounded, spot premiums fell, Yangshan copper premiums fell, and copper rod processing fees rose to rise, all indicating that copper prices are high and order growth has slowed compared to the fourth quarter of last year. Downstream, downstream procurement demand is moderate, not enough to support copper prices to continue to rise, the future needs to improve the supply and demand to follow up.

As of early March, no signs of strong growth in copper consumption have been seen. From copper processing fees of view, a slight rebound in early March, but well below last year's April-June level. The survey found that as of March 3, the 8mm copper rod processing fee was reported at 450-650 yuan/ton, and most of February reported at 430-630 yuan/ton, while last April it reported 520-720 yuan/ton.

From the perspective of explicit inventory, on February 26 (Lantern Festival), the Shanghai Futures Exchange's copper inventory rose to 148,000 tons. In 2019, the Shanghai Futures Exchange's copper inventory was about 200,000 tons. In absolute terms, The cumulative stock in 2021 is not as good as 2019, but it is mainly due to the base number, and the relative increase is not much different. As of the week of March 5, the Shanghai Futures Exchange's copper stocks rose to 163,000 tons, driving the global copper stocks to over 300,000 tons, which was down to 208,000 tons before. Looking back at history, when the dominant inventory rises, the pace of copper price rise will slow down.

To sum up, in the medium term, the Fed’s emphasis on the unemployment rate is much higher than the inflation indicator and has a higher tolerance for inflation. Therefore, the liquidity of the US dollar will not shrink too quickly, and the rise in copper prices will hardly end. In the short term, due to the violent rise in copper prices after the Spring Festival, the absence of Chinese demand drivers, and the rising U.S. Treasury yields leading to asset price revaluations, copper prices are likely to change from a fast-rising rhythm to an oscillating rhythm.

Winland Metal supplies various grades of copper pipes and copper pipe fittings . Copper materials are widely used in various industries. Capillary copper pipes play a significant role in air conditioning, refrigeration, electronics and other industries.