In 2018, the overall price of copper fell by 17.42%, which was completely different from the market expectation. The reason for the decline in copper prices is mainly from the macro aspect. First, the momentum of the global recovery is obviously less than expected. Except for the US and Japanese economies, other major developed economies have experienced different degrees of recovery momentum. Second, trade protectionism has risen, and this trade dispute has presented a long-term and complex nature. Finally, the Fed continued to raise interest rates, and the US dollar index and US bond yields continued to rise, leading to capital outflows in emerging market countries, currency depreciation, and different levels of currency crises in countries such as Argentina and Turkey.
In 2019, based on the judgment of the global economic growth rate, it is difficult for copper prices to go out of the market, and there is still room for correction. Copper has long been supported by the cost of a 90-point copper mine. In 2019, the cost of a 90-point copper mine will be raised to $5,836/ton, and the bottom of copper is moving up. It is estimated that in 2019, LME copper will operate on the first line of 5,800 US dollars / ton, domestic Shanghai copper futures will fluctuate between 45,000 and 50,000 yuan / ton, and US copper may fluctuate in the 2.4-2.9 range.
Copper ore and refined copper supply and demand - quantity level
Copper price reflects the contradiction between long-period copper supply and end consumption demand. Copper price is the fastest adjustment price to stimulate long-term supply and demand recovery. The copper mine construction period is usually more than 5 years, and the incentive copper price that stimulates the mine to put into production to meet the demand growth in the next five years is the theoretically reasonable price.
In 2018, global refined copper showed a gap of 260,000 tons, and SHFE and LME copper stocks were in very low positions in recent years. The smelting of overseas smelters is particularly large, and the suspension of production and repair of smelters such as Sterlite, Pasar and Chuiquicamata has caused the narrowing of overseas copper supply. On the demand side, global refined copper consumption grew by 3.9%. The main contribution comes from China. The tightening of scrap copper sources is a very important reason. From the perspective of terminals, the cumulative growth rate of real estate starts in January-November was 16.8%, which led to copper consumption. At the same time, although the completion of grid investment has declined, the main decline is in aluminum cables, and copper cable deliveries are still higher than in 2017.
In 2019, the global balance of supply and demand for refined copper is expected to be basically balanced. In terms of supply, the first half of the year, the smelting plant at home and abroad stopped production inspectionThe disturbance of the repair is still very large, affecting more than 400,000 tons. Therefore, the supply will be very scarce in the first half of the year. In the second half of the year, with the retreat of the overhaul, and the centralized production of domestic smelters, the supply will resume
. We expect China's refined copper production to increase by 900,000 tons and global refined copper production to increase by 700,000 tons. On the demand side, the US tax cuts and fiscal effects have weakened, and after the continuous rate hike, the United States has also come to a position of credit contraction, and the downward pressure on economic growth next year is very high. Emerging market countries may be stable. Domestic automobile and air-conditioning consumption will remain sluggish, and the power delivery of copper cables will remain stable. Real estate Q1 will still maintain a high level of construction above 10%, but it faces the risk of collapse after the middle of the year. Combined with the assumption that the amount of scrap copper metal imported will be reduced by 100,000 tons next year, we expect domestic refined copper consumption to increase by 2.4% next year and global growth by 2.0%.
Upstream Copper Mine Fluctuation - Supply Fluctuation Core
There are not many new projects in 2019, only the two copper mines of Panama Copper and Carrapateena, and the Panama Copper Mine will be put into operation in the first quarter, with a total annual contribution of 150,000 tons. Around, Carrapateena is tentatively scheduled to be Q4. Other increments come from the expansion of existing mines and increased productivity. The biggest production cut next year is in Grasberg, as it will move from open pit mining to underground production in the second quarter. Freeport expects the mine to be reduced by around 300,000 tons next year. La bambas and Sepon also fell slightly.
In 2018, the global mine increase was 3.0%, mainly due to the resumption of production at the Escondida copper mine. The production of the Escondida copper mine was more than 300,000 tons higher than in 2017, and the production of the Grasberg copper mine was very high. A substantial increase in the production of DRC's Kamoto copper mine is around 70,000 tons.
Overall accounting, the supply of copper mines increased by 2.9% in 2019. In the long run, the future production of copper mines is still relatively optimistic. Anglo American has made a final investment decision and will continue to develop the $5.3 billion Quellaveco copper mine in Peru. In addition, Pumplin Hallow, Oyu Tolgoi, Kamoa PThe hase1 and Spence projects have been commissioned for production. In recent years, African mines have grown rapidly. At present, copper production in Africa has accounted for 10% of global copper production, mainly concentrated in the Congo and Zambia. At present, the African region still has great potential, especially in the Congo region, and the future production of copper concentrates may reach 2 million tons/year.
Copper mine cost and refined copper cost-price level
In the long run, copper prices are supported by the 90-point copper mine cost. The cost of the 90-point copper mine this year is $5,512/ton. At present, the price of copper is around 6,000 US dollars, only 5.6% of the mining enterprises are losing money. At the position of 7,000 US dollars / ton, only 1% of the mining enterprises are losing money. According to CRU's forecast, due to the increase in labor costs and raw material costs, the cost of copper mines at 90 cents in 2019 will be further raised to 5,836 US dollars / ton, and the cost of copper mines at 75 percent will be raised from 3,959 US dollars / ton to 4,599 US dollars / ton. That means that the bottom of the copper is rising.
Copper demand terminal market performance
Copper is widely used in industrial production, of which China is the largest consumer, accounting for about 50%. And because China's industrial weight is greater, the economic cycle is more obvious, and the fluctuations are larger, so we only pay attention to China in detail. In the global consumption structure, power grids and manufacturing industries occupy an important position, while in China's consumption structure, power grids and real estate occupy a large part.
China's power grid consumption
Although the national grid investment completion amount declined in 2018, but this year's state network investment focus on the town grid, copper conductor cable delivery volume has not fallen sharply, The reduction was mostly due to the amount of aluminum conductor cables, and the fourth quarter delivery increased by 6% compared to 2017. According to the statistics of 2019, considering that the State Grid will also invite bids next year, the consumption of power grids will remain worry-free next year.
Whether real estate can start high
The high start of real estate is also a major factor supporting copper consumption. In the next three months, real estate starts will maintain a growth rate of more than 10%, but after the middle of next year, Real estate faces the risk of collapse.
Manufacturing is weak, copper demand is hard to pick up
Morgan Global Manufacturing PMI is also in 2017In the fourth quarter, it began to turn down and lead the decline in copper.
In December 2018, China's manufacturing purchasing managers' index (PMI) was 49.4%, down 0.6 percentage points from the previous month. Below the critical point, the manufacturing boom has weakened.
Copper's rare long-term factors - low inventory and scrap copper import restrictions
prices and inventory often do not match, compared to Shanghai copper prices and inventory changes, found that the correlation between the two is only 20%, The basic guidance for unilateral prices is not particularly obvious. In fact, inventory is more suitable for guiding spreads and premiums. If you look at the market from the inventory side, the inventory has been falling, so it should be much for the future. The inventory in the first half of the year is also falling but the price has not risen. Instead, it has fallen all the way. If the copper's falling time node is combined with the macro. See more clearly. Low inventory often affects the basis, but it also partially reflects the pessimistic demand for the future. So investors should not blindly do more. However, it is necessary to pay attention to the low inventory of copper. If the consumption-driven inventory declines rapidly, the copper price will rise simultaneously.
Inventory as a result of a balance between supply and demand, is critical to both unilateral and structural dimensions. On the one hand, copper prices are more affected by “future stocks”, that is, the matching of long-term copper mines and demand determines the general trend, while for short-term trends, copper prices are more guided by economic fundamentals and macro sentiments. And when the macro factors are in line with the direction of inventory changes, resonance will form, and if this is the case, the absolute price will be constrained. From the perspective of structure, it is precisely the long-term and long-term structural distortions caused by macro factors and inventory changes, which leads to obvious opportunities for near-term monthly arbitrage.
Restricted scrap copper imports
At the end of 2018, so-called “waste seven categories” such as scrap wires, waste motor motors, and bulk scrap hardware have been officially banned from import. Since the beginning of this year, the approval of restricted copper scrap imports has been greatly reduced, with a total volume of 999,700 tons, a cumulative decrease of 66.7%. The reduction of seven types of scrap copper directly led to a sharp drop in the amount of imported copper scrap in 2018. According to SMM statistics, from January to November 2018, China imported a total of 2.24 million tons of scrap copper, a year-on-year decrease of 36.9%.
After the import of seven types of scrap copper was restricted, the number of six types of scrap copper imports increased. From the perspective of physical quantity, the proportion of the six categories isMore than 80%, much higher than last year's 48%, the grade of imported scrap copper this year is 20% higher than last year, so the actual amount of metal is not very large.
Macro perspective - those important stock bond relationships
US corporate spreads and copper are negatively correlated, copper prices and US debt 10Y trend the same
US corporate bond spreads slowly began this year After the expansion, the US corporate spread and copper showed a negative correlation. The price of copper and the US debt 10Y trended the same. The US debt began to decline after the previous 3.261 topping, and now it is down to 2.721, while the short-end (2Y) is down to 2.522, 2Y. -10Y has been hanging upside down for nearly a month. It is affected by the weak US economy and the Fed’s interest rate hike in December. After the upside down, it is the best time to short industrial products.
Caterpillar's share price has been positively correlated with copper's share price
Caterpillar's share price decline reflects the market's pessimistic expectations for the construction and manufacturing industries, and copper is a flag of global manufacturing. Caterpillar's balance sheet shows that the company's inventory is gradually increasing, from the 2017 Q4 inventory began to increase until now, and the price of copper also began to build in the fourth quarter of 2017, and then fell.
The share price of Caterpillar, the major US machinery manufacturer, fell 20% this year to $126, although the company's earnings may have increased by 70%. This decline reflects the company's important role in the global industrial economy. Caterpillar's stock was hit as Wall Street was worried about growth prospects. As Barron's Weekly pointed out last week, these stocks don't look expensive. Caterpillar's three main divisions – construction, resources and energy – have released higher profit reports, and the mining industry has benefited in particular from the waning demand growth after years of slow sales.
Inflation is indefinite, copper prices are under pressure
The current macro expectations have already been played, and only one fuse is needed to open the trend of copper decline. The downward CPI of China and the United States almost ended the last hope of the rise of copper. Copper is expected to open a relatively large downside in the future. Copper price is the result of the market's interaction with current realities and future supply and demand expectations, including known and unknown market information. Since the price is the concentration and deduction of information, the price level is bound to be revealed.Show corresponding market views and expectations.
The high correlation between emerging market exchange rates and copper prices is expected to continue
In the past copper price research framework, the relationship between emerging markets and copper prices was often analyzed, based on the fact that emerging market economies are better and copper consumption is strong. I have not spent too much ink on exchange rate research. However, in the third quarter of this year, the correlation between exchange rate and copper price in emerging markets reached a staggering 0.74, indicating that the core logic of market transactions at that time was the emerging market exchange rate, rather than the fundamentals we usually studied.
Looking forward to 2019
The pressure of economic downturn in 2019 is very high. The US side is due to the weakening of the tax cut effect, and the credit contraction after the US continues to raise interest rates. Now the US Treasury yields are approaching upside down. The probability that the economy will fall into recession in the next two years is continuing to rise. On the Chinese side, the financing contraction brought about by leverage and the possibility that the demand for real estate and manufacturing will weaken in the middle of next year will drag down the price of copper.
In terms of fundamentals, the fundamentals of copper in 2018 were very strong, with a gap of 260,000 tons for supply and demand. The overseas smelters have been disturbed a lot, and the consumption of refined copper has exceeded expectations. At present, the inventory of the three major inventories plus bonded areas in the world is less than 800,000 tons. We count that there are still many overhauls at home and abroad in the first half of next year, with a total impact of more than 400,000 tons. The supply of refined copper in the first half of the year will be very tight. In the second half of the year, with the fading of the overhaul, and the domestic smelters began to be put into production, the supply pressure will ease. It is expected that the supply and demand will be basically balanced during the year.
Price Judgment: Under the premise of increasing economic downside risks in 2019, it is still difficult for copper prices to rebound sharply. However, the cost support line of the copper mine below has risen to US$5,836/ton, and the bottom of the copper is rising. It is expected that the copper price will run at $5,800/ton in 2019. Domestic Shanghai copper futures will fluctuate between 45,000 and 50,000 yuan/ton, and US copper may fluctuate between 2.4 and 2.9.
In terms of arbitrage, after the Spring Festival, we can pay attention to the positive opportunities. On the one hand, after the Spring Festival, the downstream will gradually resume work. In March, the peak season of consumption will come, and the smelter will increase the maintenance, and the spread will narrow. In terms of internal and external markets, due to the large disturbances of overseas smelters in the first half of next year, the situation of weak inside and outside will be more obvious. It is recommended to pay attention to the opportunities of internal and external sets.