Gu Fengda: News that FRB is more likely to cease QE overshadowing copper market outlook

Asian Metal: The economic data were sluggish in Europe and the global geopolitical crisis reared up again recently. However, the American economy is looking positive, so will the FRB quit its QE policy as scheduled and what impact do you think the macro-economy will have on copper price trends?

Gu: The weather vane of the global financial market has moved towards the largest global economy recently, and away from the geopolitical crisis. Although reports about the geopolitical crisis continue to be seen, its short-term influence has waned. The latest conduct of the FRB will be the highlight for the global macro market.

Looking back on the FRB releasing the meeting summary of the interest rates discussion conference in July, this indicates that the interest rate may be lifted earlier than expected. However, the US dollar index skyrocketed to its highest level since last September after the announcement around “interest rates to increase earlier because of employment recovery” put forward by the Chair of the FRB, Janet Yellen last week. Two factors contributed to the surge. On the one hand, the announcement is good because it will encourage people to have more confidence in the American economy. On the other, it offers more support for expectations of an earlier interest rate increase.

In fact, the FED's most noticeable change of late has been the louder voice of the “Hawk”. With more indicators showing US economy recovery, the Hawk is unable to control the FED’s intention to raise interests in advance any longer. So we can say that the rapidly strengthening US dollar is closely connected with each slight movement in the FED's position. It should be noticed that the Hawk's growth has not impacted the Dove's control yet, so it will be at least six months or more before we see interest rates increase but the quantitative easing monetary policy is expected to be stopped this year. The US economic data has continued to improve and, given the European central bank’s tendency to further ease policy, the US dollar will basically stabilize with the improving trend, which will put some pressure on international bulk goods priced in US dollars, such as copper.

Asian Metal: The Chinese economic data included both positive and negative information in August and the industrial economy didn’t develop particularly well. As a result, investors are hoping that the government will carry out policies to stimulate the economy in H2. What's your opinion on this?

Gu: The economic data released in August showed a picture of "clear to light rain", indicating that previous expectations for a periodic economic recovery were over-optimistic and the H2 economy still needs more stimulus policies. The data from core sectors including credit, investment and consumption completely failed to meet expectations, while the figures from the "Keqiang Index" in terms of railway transportation and electric energy production were likewise unsatisfactory. In addition, investors are still focusing on the real estate market. The widespread fall in house prices had a significant impact on the financial markets but at the same time this made it more likely we would see a further relaxing of controls at the decision-making level.

China's H2 economy will mainly operate along the lines of "slight stimulation". High-level meetings and the recent speech revealed the government’s determination to continue deepening reform and directional control but neither the “promoting reform” nor "steady growth" measures will have a noticeably weaker effect on boosting the industrial manufacturing sector than on the service industry. It remains to be seen whether H2 stimulating policies can have a positive influence on real copper demand. It’s difficult to see copper consumption overcoming the paper tiger situation.

Asian Metal: Will global copper outputs continue to increase in H2 in view of the fact that Indonesia has resumed copper ore exports, driving up copper ore outputs globally and leading to rising copper processing charges in August?

Gu: The focus within the copper concentrate market since August has definitely been on the copper ore export resumption by Indonesia. Overseas mines and traders showed strong interest in selling and were actively seeking out domestic smelters, boosting orders and activities in the market. Reportedly, the first batch of copper concentrate since Indonesia resumed exporting the material, totaling 10,000t, was delivered to China at the beginning of August. Meanwhile, another Indonesian copper ore producer, Newmont, restarted operations at its copper mines. The total copper ore capacity in Indonesia is 1.08 million tonnes, with average annual output reaching 600,000t. Indonesia’s resumption of copper ore exports has multiplied supply in the copper ore market. TC/RC for spot copper concentrate may rise to USD140/14 cents in the future, which will continue to encourage smelters to produce. In fact, high copper concentrate processing charges will spur smelting plants to produce more actively, and they can also sell copper concentrate to bonded areas, given the low ratio of prices in Shanghai against those on the LME, to offset their losses and gain some premiums on the basis of CIF. Therefore, on the back of most smelters having completed maintenance in H1, copper outputs are expected to increase markedly in H2.

Asian Metal: China’s copper output has been stable with improvements since the beginning of 2014, and imports have also increased. Moreover, it is typically the off season for consumption at present, so why are domestic spot premiums continuing to rise slightly? What do you think about the supply-demand relationship in the current Chinese copper market?

Gu: Domestic copper prices fluctuated significantly with an uptrend following the depreciation in August, and as for spot supply and demand, availability in the market reduced rapidly from the previously sufficient supply before delivery for August, which was reflected in the fact that sellers with stocks were unwilling to sell, while traders were active in purchasing. The spot market lacked supply in mid-to-late August, and stockholders were bullish about the future market with soaring copper prices supported by tight supply. This limited availability has not improved since then. Although stockholders were more willing to sell materials, premiums for copper held firm at high levels as large-scale enterprises made purchases, and premiums are likely to be pushed up further in the near future. The tightness in the supply will be eased in September when some smelters resume operation following maintenance.

It is worth noting that the domestic copper financing business cooled somewhat following the Qingdao copper scandal. The copper stocks in bonded warehouses are now around 650,000 tonnes, down by nearly 200,000 tonnes from the peak in April. Reductions in the copper financing business, along with stricter regulation, have limited imports of copper, and as a result imports in China fell significantly during July. The ratio of prices in Shanghai against those on the LME continued to recover, but with stricter regulation from banks and customs, downstream buyers showed less interest in purchasing with higher costs for establishment of L/C. In addition, imported copper entered customs slowly, and very little imported copper flowed into the market, so it was expected that imports would remain at a low level in August. According to copper stock data from the three major exchanges, copper inventories in bonded warehouses continued to slide, but reported stocks have not increased significantly, and the possibility of a short squeeze corner cannot be ruled out.

Asian Metal: What is your forecast for the copper price trend in H2?

Gu: From the point of view of technology, prices will increase in the short and medium term. Figures are likely to remain stable at USD7,050-7,070/t or continue to rebound to USD7,210-7,230/t. However, prices will decline in the long term. There are two factors governing supply and demand in the copper market in H2: on the one hand, the reduction in the financing aspect of the market has resulted in less activity of this type, and on other hand, copper smelters expect high yields in H2. Goldman Sachs pointed out that the Chinese government has started to conduct stricter investigations into commodity financing following the Qingdao copper scandal, with banks restricting loans for metal financing, and less financing activity will result in further increases in spot copper supply in H2. In addition, the enhancement in copper smelting capabilities will lift copper supply across the world and reduce imports of refined copper in China, as well as suppressing copper prices.