CITIC Securities: The current high copper price boom market has not yet ended, but in the second half of the year, we should be vigilant against the "last fall" of copper prices

Zhitong Financial APP learned that CITIC Securities released a research report saying that the recent rapid rise in copper prices, the supply shortage and the United States "secondary inflation" trading main line is still the core factor leading the upward trend of copper prices, the current high copper price boom has not ended, but in the second half of the year, we should be vigilant against the "last fall" of copper prices, and the whole year may show a trend of rising and falling. From a medium-term perspective, the current overseas is still in the early verification stage of the active replenishment stage, the trend of the commodity market is too early, and the transmission of the Fed's interest rate cut to the upward trend of the overseas economy still needs time and patience.

The main views of CITIC Securities are as follows:

On the demand side, the global economy continues to improve slowly, and U.S. inflation remains sticky

In March, the global manufacturing PMI index rebounded month-on-month, showing the characteristics of "China's rebound, emerging improvement, Europe's downturn, Germany's weakness, the United States' prosperity, Japan's South Korea's decline, and India's brightness". The prosperity level of the mainland's manufacturing industry rebounded in March, with the PMI reading rising 1.7 percentage points to 50.8 from 49.1 in the previous month. The U.S. ISM manufacturing PMI index rose 2.5 percentage points to 50.3 from 47.8 in the previous month, higher than the market expectation of 48.3; Eurozone manufacturing readings continued to decline, and the German and French PMI readings were lower than expected, among them, the German PMI index fell to 41.6 from 42.5 last month, a decrease of 0.9 percentage points, lower than market expectations of 43.1, the lowest value in nearly five months; The French manufacturing PMI index fell 1.3 percentage points to 45.8 from 47.1 in the previous month, lower than market expectations of 47.5; Japan's manufacturing PMI rebounded 1.0 percentage points to 48.2 from 47.2 in the previous month, with domestic and foreign demand still showing signs of contraction and affecting production performance, and the Red Sea crisis continues to cause transportation delays. In addition, India continued its previous strong performance and became one of the few major countries with a manufacturing PMI that remained above 55, recording 59.2 in March, up 2.3 percentage points from 56.9 in the previous month. South Korea's manufacturing PMI index fell 0.9 percentage points to 49.8 from 50.7 in the previous month, falling back below the boom and bust line.

In terms of real estate sales and investment in mainland China, the current real estate investment continues to decline and the sales margin improves, and it is important to pay attention to whether policies will be introduced to block the pressure on the real estate market in the context of declining housing prices. In March, the cumulative year-on-year growth rate of real estate sales in mainland China rebounded to -19.4% from -20.5% in the previous month, and the cumulative year-on-year growth rate of real estate development investment fell to -9.5% from -9.0% in the previous month. The construction copper consumption PMI index recorded 47.9 in March, a sharp rebound from 39 recorded in the previous month. Driven by the gradual implementation of policies such as trillions of treasury bonds, copper prices rose slightly from March to April. However, in the medium and long term, it is expected that the recovery of mainland real estate sales and investment performance will still be long-term and volatile, and the market's pricing of copper still needs to focus on the sustainability of mainland real estate performance. The MSCI World Real Estate Index, which is highly correlated with copper prices, rose 5.58% year-on-year in March. At present, the continuous decline in housing prices in first- and second-tier cities may trigger real estate companies to sell assets. If housing prices in first- and second-tier cities continue to fall, the value of assets of real estate companies will decline, and the difficulty of financing will rise, and real estate companies may be forced to sell assets to compensate for debt pressure. As the inventory of commercial housing is at a historical high, the stabilization of housing prices needs to be further strengthened by policies.

In terms of investment in the mainland's power grid and power supply, there has been little change in infrastructure policies recently, and we are concerned about the possible steady growth and incremental policies of the Politburo meeting in July. From January to March, the cumulative year-on-year growth rate of capital construction investment in mainland power grid rose to 14.7% from 2.3% in the previous month, and the cumulative year-on-year growth rate of power supply infrastructure investment fell from 8.3% to 7.7%. The MSCI Global Electrical Equipment Index, which is highly correlated with copper price movements, rose 33.1% year-on-year in March. Looking backwards, it is expected that local special bonds and special treasury bonds will be issued in the second to third quarters, but it is difficult to relax the constraints on urban investment financing. As the impact of the additional issuance of government bonds subsides, the growth rate of infrastructure investment is expected to be stable and moderate. Pay attention to the possible incremental policies to stabilize growth in the subsequent July Politburo meeting.

In other aspects of the mainland, the recent growth rate of bulk consumer goods and consumer electronics in the mainland has been mixed, and the automobile sector is relatively prosperous. In addition to power grids and real estate, the downstream demand for copper also involves home appliances, consumer electronics, automobiles, etc. In terms of automobiles, the cumulative production of automobiles and new energy vehicles continued to rebound year-on-year, recording 5.3% and 29.2% respectively in March. In terms of home appliances, the cumulative output growth rate of air conditioners in mainland China fell to 16.5% from 18.8% in the previous month, while the cumulative output growth rate of refrigerators remained the same as 12.8% in the previous month. In terms of consumer electronics, the cumulative year-on-year growth rate of computer and mobile phone production was mixed, with the cumulative year-on-year growth rate of computer production rising from -1.3% in February to -0.8% in March, and the cumulative year-on-year growth rate of mobile phone production falling to 16.7% from 31.3% in February.

In terms of overseas economy, terminal demand for construction and automobiles in the United States, Europe and Japan continued to decline or negative growth. The current focus of the market is still on the fear of "secondary inflation" in the United States and triggered a concentrated rally in the commodity market. In the United States, the preliminary GDP growth rate of the United States in the first quarter of 2024, the seasonally adjusted annualized rate of real GDP recorded 1.6%, down from the previous value of 3.4%, and lower than the market expectation of 2.5%. Overall, the U.S. economy is on a downward trend, but the domestic vitality is still resilient, with overall weakening consumer demand, shrinking consumption of goods, accelerating consumption of services, and the resilience of service consumption after the exhaustion of excess savings may come from the wealth effect brought about by the still-tight U.S. labor market and the rise in U.S. stocks. In addition, the sales of new homes in the United States fell to 662,000 units in February from 664,000 units in the previous month, and the year-on-year growth rate of motor vehicle orders in the United States in March rose to 0.7% from 0.5% in the previous month. In March, the year-on-year growth rate of building permits in the euro area rebounded to -9.0% from -11.2% in the previous month, and automobile production showed a downward trend. The year-on-year growth rate of housing starts in Japan fell to -11.5% in March from -9.7% in the previous month, and downstream performance such as electrical machinery was also relatively weak. However, the continued upward trend in U.S. inflation data and expectations from March to April triggered investors to increase their allocation of commodities, which in turn triggered a general rise in the prices of gold, crude oil, and copper.

Supply side: Supply shortages and expectations are the core factors affecting copper prices at present, and the C1 cost curve has dropped to US$5,204/tonne

In terms of supply and demand balance, the supply of refined copper has continued to be tight in 24 years, and the output of the smelting end has been reduced. Globally, the consumption of refined copper in March was 2.327 million tons, and the supply was 2.380 million tons. From January to March, the cumulative consumption scale of refined copper was 6.980 million tons, and the cumulative supply of refined copper was 7.139 million tons. From January to March, there was a slight surplus month by month. Despite the good supply of refined copper in the first quarter, a series of mine-end shutdowns have raised concerns about future copper supply shortages and triggered a larger-than-expected surge in copper prices. According to the International Copper Research Group (ICSG), global copper concentrate production in January 2024 hit a 10-year low of 74.6%, despite a year-on-year increase of 2.6%. Supply-side disturbance events such as the shutdown of some ore sources at the end of the world's major copper mines such as First Quantum have disturbed the copper supply. The shortage of supply at the ore end was obviously transmitted to the performance of the smelting end, and the copper rough processing fee fell rapidly. At the end of March, the data was only about $11/1000 tons, and in April, it fell further to 3.4 US dollars/1000 tons, which continued to be well below the breakeven point of 50-60 US dollars/ton. In order to cope with the pressure of profitability, domestic copper smelters actively regulate and control smelting capacity, and after entering April, domestic smelters plan to gradually arrange maintenance, and the tightening of the mine end to suppress the supply of refined copper may be further revealed. In March, China's refined copper consumption scale was 1.293 million tons, and the supply scale was 1.060 million tons; From January to March, the cumulative consumption scale of refined copper was 3.880 million tons, and the supply scale was 3.181 million tons. The supply-side gap in the second quarter may still be widened, and it is still necessary to continue to pay attention to the supply-side disturbances in the future.

In terms of the ore end, the cost curve and capital expenditure of the copper ore end have both declined slightly. In terms of cost curve, the C1 cost curve recorded $5,203.88/mt in the third quarter of 2023, a slight decrease from $5,707.90/mt in the second quarter. Total cash cost was recorded at US$6274.80/tonne. TC charges on March 29 were $11.39/1,000 mt, down about $9.39/mt from $20.78 in the previous month. In terms of capital expenditure, the average capital expenditure of the world's major copper miners recorded the highest value in the fourth quarter of 2022, and then fell slightly to a high level, with the average capital expenditure in the third quarter of 2023 increasing by 20.2% year-on-year and recording -7.1% quarter-on-quarter.

In terms of inventory, copper inventories have continued to accumulate recently. The scale of this round of copper inventories has continued to accumulate since the low point in January, and the inventory scale from March to April was relatively stable, with the total scale of LME, COMEX and SHFE inventories in the week of April 20 being about 380,000 tons, a year-on-year growth rate of 148.1%.

Financial attributes: The continued rise of the U.S. dollar index may affect the performance of industrial metals such as copper

In terms of the U.S. dollar index, the continued appreciation of the U.S. dollar index may be detrimental to the performance of industrial metals such as copper. Recently, the U.S. economy has been resilient, and the fundamental difference between the U.S. and non-U.S. economies is still large, supporting the strong operation of the U.S. dollar index. The U.S. dollar index recorded 104.487 on 29 March. Looking ahead, the difference between the economic fundamentals of the United States and Europe still exists, and the disturbance of the U.S. election will continue to strengthen the U.S. dollar index in the second and third quarters, and affect the performance of industrial metals such as copper.

In terms of liquidity, the Fed's interest rate cut is expected to be delayed, and the impact of liquidity on copper prices may be mainly volatile, focusing on the trend of U.S. bond inflation expectations. Recently, the resilience of the U.S. economy and inflation have exceeded expectations, and the market has gradually revised down the Fed's interest rate cut expectations, and it is expected that the first interest rate cut may be in the second half of the year, and the interest rate will be cut about once throughout the year, and the possibility of no interest rate cut throughout the year is not ruled out. SOFR's 12-month real interest rate was 5.21% on 22 April. In addition, long-term U.S. Treasury inflation expectations have risen recently, recording 2.53% on April 22, and it is expected that inflation expectations may not fall significantly before the "secondary inflation" concerns are lifted.

In terms of risk, the copper/gold ratio has fallen further to one standard deviation below the average line. In terms of risk appetite, the copper/gold ratio eased to 4.05 in April, slightly below the half-standard deviation below the average (4.169).

The supply shortage and the main line of the "secondary inflation" transaction in the United States are still the core factors leading the upward trend of copper prices. Looking forward to the middle and second half of the year, the continued appreciation of the US dollar index may not be conducive to the trend of copper prices, but combined with the model-based calculation and analysis, the driving effect of the US dollar index on copper prices is not the core pricing factor affecting copper prices. At present, the main line of copper market transactions is still the overseas "secondary inflation" transaction of commodity attributes and the shortage of the supply side. On the demand side, the concern of "secondary inflation" in the United States still needs to be further verified by the inflation readings in May and June, combined with the analysis of the subsequent inflation readings in the United States, inflation may still be sticky in the first half of the year, and the main line of the transaction may still be difficult to end; On the supply side, the mine shutdown and maintenance has not yet ended, and the TC cost is still further decreasing, and the latest progress should be closely watched in the future. Based on the analysis of the above two factors, the short-term high copper price boom has not yet ended. However, from a medium-term perspective, the current overseas is still in the early verification stage of the active replenishment stage, the trend of the commodity market is too early, the Fed still needs time and patience to cut interest rates to land in the overseas economy, and the current short-term disturbance is removed, and copper prices need to be vigilant in the second half of the year.

Risk factors:

The pace of overseas economic landing is faster (slower) than expected; Overseas inflation readings beat expectations; The intensity and pace of the introduction of the mainland's steady growth policy are lower than expected; Overseas mine production reduction disturbance exceeded expectations; Unexpected changes in the Fed's monetary policy; Oil and other related assets fluctuated sharply more than expected.