Jiang Tianming: Copper market fundamentals still weak, prices to decline further in Q4

Asian Metal: The US economic data have continued to recover recently. Do you think the Federal Reserve Bureau should end QE and then raise the interest rate accordingly? Will the QE policy in Europe improve the economy?

Jiang: Whether the Federal Reserve should end QE or not in the second half of this year is not the key factor; what the Federal Reserve cares about is the cost when QE ends. The Federal Reserve is not a charitable organization, and it has a lot of bonds following several rounds of QE. Therefore, the problem is how much they would get from selling the bonds on hand. In the event, we’ve seen that the Federal Reserve became more cautious when it mentioned winding up QE in the first half of this year. Nevertheless, the situation changed in the second half of the year, especially after the European Union started to adopt its QE policy, which resulted in the long-term bond yield in Germany falling below zero. The previously strong Euro became the carry trade currency, and funds increased the US debt purchases. The US treasury yield would decline if QE were over, and it is an opportunity for the Federal Reserve to decline its bonds. We predict that the Federal Reserve could speed up the withdrawal from QE and may not increase the interest rates unless the economy improves significantly.

In Europe, there are some problems for the economic system. If there is no significant reform, the economy may not shake off the weak situation characterized by low inflation and low economic growth, and the QE policy will simply stop the economy from weakening further.

Asian Metal: The People's Bank of China (PBOC) has injected 500 billion yuan (USD 81 billion) into the nation's five largest banks, which has had little influence on base metal markets. Moreover, Premier Li Keqiang said that China may not depend on monetary policy but would instead boost the economy through reforms. Do you think the Chinese government should continue to take up measures to stimulate the economy in the fourth quarter?

Jiang: Copper is a very mature commodity and very sensitive to liquidity, which is related to the ratio between London and Shanghai. Following both the previous decrease in the directional deposit reserve ratio and the current SLF, the liquidity in the market became loose. In Q4, we think the central bank should make banks’ loans flow into the real economy, not simply circulate among the banks, and this will change the high interest rates for the real economy.

Asian Metal: Copper prices in London and Shanghai have continued to fall in the past few days. Will the prices go down further given a series of unfavorable economic data?

Jiang: Compared to other commodities, copper price change is relatively small due to the arbitrage window. As long as there is no major bad news and no big changes for the arbitrage, copper prices may not change sharply. Although the macro economic data remain pessimistic, copper prices are unlikely to slump on the back of a low inventory and strong price structure, and the price may not reach new lows in Q4.

Asian Metal: The bullish season is approaching, but Chinese copper demand shows no signs of getting better. Will demand levels continue to support copper prices?

Jiang: The State Grid plans to complete fixed asset investment of 400 billion yuan, and 380 billion yuan of this is for the power grid, up by 20% year-on-year. In 2014, the rise in investment will be mainly in the distribution network, and the State Grid will invest around 160 billion yuan in this field, reaching a new high. However, the power grid in Jan-Jun was down by 0.6% year-on-year. In other words, the investment peak period will come in the fourth quarter. However, the improving demand won’t succeed in dominating copper prices, with Chinese copper demand mainly determined by the arbitrage window and exchange rate.

Asian Metal: In 2014, copper ore and concentrate outputs across the world continue to climb, and the operating rate of copper smelters is on the rise. Chinese copper production increased steadily. However, demand is only recovering slowly. What do you think about the relationship between copper supply and demand in China?

Jiang: The price gap between copper cathodes and bare bright copper wire in China has narrowed to RMB4,100/t, indicating that spot supply is still a little tight. Impacted by the weak economic data in China and worse-than-expected demand, the copper price range has already moved down. In addition, copper demand in China has been weak since September, and the price is likely to decrease if demand doesn’t improve significantly.

Asian Metal: What are your thoughts on the copper market direction in Q4?

Jiang: Weak copper market fundamentals are a foregone conclusion in the fourth quarter, but the low inventory and high premiums may stop prices from tumbling. Copper prices may continue to decline unless the arbitrage window closes and RMB depreciates sharply. We think copper prices may continue to fall in the fourth quarter, although there is little possibility of prices hitting new lows.