Lian Zheng: Supply and demand go into reverse, copper outlook for 2015 still pessimistic

Asian Metal: The US dollar index has continued to rise recently, and the precious metals and nonferrous metals markets have been under pressure. What are your thoughts about the direction of the US dollar?

Lian: The US dollar will continue to be strong in the medium to long term. The US economy is recovering smoothly with employment data and the real estate market continually improving. Moreover, the stock market in the US remains strong, which also stimulates the economy. Therefore, the Federal Reserve’s qualifications were met for winding up the quantitative easing policy and then tightening monetary policy, which is the internal reason for the US dollar strengthening. Additionally, the economies of China and Europe remain weak, and monetary policy has been easing in general, which also pushed up the US dollar.

Asian Metal: China’s central bank lowered interest rates unexpectedly after two years, which seems to have had little influence on the nonferrous metal market. Will the central back continue to cut the interest rate or decrease the reserve requirement? Will easing liquidity push up copper prices?

Lian: The move to cut interest rates indicated that the economy had sunk too far for the Chinese government to bear and the weakness was worse than expected. Therefore, China’s actions in lowering interest are not good for nonferrous metal markets in the short and medium term. In 2015, China should continue to implement the policy step by step, and it is possible it will either lower the interest rate or reserve requirement, depending on how much the economy shrinks. As a result, as long as the interest rate cuts do not reverse the economic direction, the move will not push up copper prices. In addition, copper demand relies mostly on financing import deals, and the arbitrage window is likely to close after China cuts interest rates, while the United States increases the rate. If financial demand shrinks, it will be difficult for copper prices to rise. The scandal centered on Qingdao Port has made it increasingly difficult to access credit through official channels, and financing deals have been in decline ever since that time.

Asian Metal: Copper prices experienced a sharp decline and rise recently after a short-lived consolidation. What do you think about the direction of the copper market?

Lian: The recent copper price trend indicates the fundamentals remain weak and supply continues to rise. The prices will consolidate again at low levels in early 2015 after a decline but may not break through RMB46,000-47,000/t (USD7,516-7,680/t). In the short term, copper prices are likely to fluctuate within a narrow range.

Asian Metal: With the production of copper ore and concentrate rising, the global copper market should see a surplus in 2015. Some participants are pinning their hopes on China’s State Reserve Bureau, but will the bureau continue to stockpile copper next year?

Lian: Since late 2013, the State Reserve Bureau has already stockpiled copper three times, and it is said that it purchased around 500,000-700,000t of copper. Seen from the spot copper premiums/discounts and the performance in the spot market, the move did not prevent copper prices from falling. Therefore, if the State Reserve Bureau continues to stockpile copper next year, it will not influence copper significantly, as long as domestic copper supply does not decrease quickly in a short time.

Asian Metal: China’s copper smelting and reefing capacity continues to rise, and the monthly copper output has reached 750,000t. Nevertheless, China’s demand growth is obviously slowing down, so will exports continue to increase in 2015?

Lian: In 2014, Chinese copper exports climbed sharply, mainly because of the unfavorable arbitrage, and this indicates that domestic supply has become increasingly surplus. Smelters are actively increasing copper exports in order to stabilize the prices, and will continue to export copper as long as the price ratio between Shanghai and London is available. Whether the exports rise or not mainly depends on the ratio. Looking ahead, copper prices in Shanghai may continue to be weaker than those in London, so it will be impossible for copper exports to decline sharply.

Asian Metal: In 2014, investment in the power industry in China was lower than expected, while the air-conditioner industry fared better. However, the real estate market remains sluggish, and copper consumption growth is declining. What are your thoughts about Chinese consumption in 2015?

Lian: Orders from the home appliance industry, especially the air-conditioning industry, are unlikely to increase in 2015, since the real estate market in 2014 is so weak. Power investment growth has been far weaker than expected and is likely to rise in 2015. However, the focus will mainly be on ultra-high voltage, and the consumption of copper will be limited. With automobile imports in the free trade area rising, the automobile industry in China may slow down. Even if the Chinese government relaxes its grip over the real estate market, things will not improve significantly, and the sales volume and investment are not looking optimistic for 2015. As a whole, copper consumption growth in 2015 is likely to go down.

Asian Metal: Will copper prices continue to fall in 2015?

Lian: The macro economy across the world will polarize, and China’s economy is at risk of declining. Additionally, the copper fundamentals may worsen, while prices could decrease further. In the long term, copper futures on the LME should sit between USD5,500-5,800/t; as to when prices will stop falling, this should depend on how China’s economy recovers.