Xu Yongqi: Copper prices to rise in the short term but still under pressure in H2

Asian Metal: Recent economic data from various countries has pointed to a gradual recovery, while the FED has said it will continue to carry out QE. What impact do you think the current macroeconomic situation will have on copper prices?

Xu: The current improvement in the global economy is largely demonstrated by four aspects. Firstly, the European and North American countries will continue to adopt the policy of monetary easing for the near future. The final GDP value in the US in Q1 was cut significantly, and personal spending growth was short of market expectations in May. Moreover, core CPI recorded a new 15-month high. The slowdown in seasonal economic growth resulted in lower revenue growth, and reduced consumption strengthened expectations the FED would postpone raising interest rates. Secondly, the Eurozone saw slow economic recovery with limited consumption growth, due to a sluggish manufacturing sector, which increased expectations of the European Central Bank imposing QE in the rate-setting meeting in July.

Elsewhere, the Chinese government has carried out micro stimulus policies since March 2014, such as the continuous RRR reduction policy for some financial sectors, making use of expansionary fiscal and prudent monetary policies to arrest the rapid decline in economic growth, as well as easing the adverse effects on the economy caused by structural adjustments, through a series of measures including lowering investment, promoting exports, increasing consumption and stabilizing growth.

Global liquidity is still loose, and the low interest rate environment works in favor of copper prices. However, as the world’s largest copper consumer, China’s investment growth has been on a downtrend for several months, which will limit any growth in copper consumption in the future.

Asian Metal: What do you think about developments in the global economy in H2 and will things continue to improve?

Xu: Countries across the whole world are endeavoring to sustain economic improvements. The US may decide against putting forward measures to raise interest rates after QE comes to an end in November. Moreover, European Central Banks’ increasing pursuit of QE and China’s determination to keep economic growth around 7.5% are both favorable for steady economic recovery. Therefore, I would expect that the global economy will keep on improving in H2.

Asian Metal: The investigation into copper financing at Qingdao Port was concluded over half a month ago. What do you think its impact will be on the copper market? How will this case influence copper imports in China in the future and will imported copper in bonded areas be poured into spot markets across China?

Xu: The probe at Qingdao port into loan irregularities involving stocks in warehouses is similar to the steel trading case, although they are essentially different. The relevant banks at home and abroad paid close attention to the case, pledging to limit warehouse receipts, improving the margin ratio of financing credit and lowering the speed at which imported copper flows out of bonded warehouses. Therefore, there will be a limit on the supply of imported copper from bonded warehouses on the spot markets in future. Furthermore, the copper financing industry is highly mature with low costs, stable comprehensive profits for major businesses and perfect synchronous hedging, so I do not think that financing copper will be poured into the spot market in large volumes.

Asian Metal: Outputs and imports of refined copper across China have been on an upward trend so far this year, but why do premiums in the spot market still remain high?

Xu: According to data on the supply-demand balance sheet, supply of domestic copper is somewhat tight, as the growth in copper output has failed to meet expectations with large-scale smelters such as Jinchuan Company and Tongling Nonferrous Metals overhauling. In addition, domestic large-scale copper smelters have exported nearly 200,000t of refined copper since March, resulting in significantly increased export volumes in China. Although net imports have risen by over 40% year on year, domestic stocks have been greatly reduced.

Moreover, while consumption of copper products has been on the rise since H2, 2013, growth has slowed in comparison with the same period of last year as increases in grid investment, the major consuming sector, declined to 5%.

Asian Metal: Demand for copper from domestic downstream industries will begin to shrink with the traditional off-season for consumption approaching. What is your opinion on supply and demand in the domestic copper market?

Xu: Imported copper in bonded warehouses will be unable to flow rapidly into the spot market when the arbitrage window between London and Shanghai opens. Meanwhile, domestic copper smelters will still export large volumes of materials in H2, and supply will remain tight. As for copper demand, growth in grid investment is fraught with uncertainties in H2. The State Grid Corporation of China plans to realize over RMB400 billion of fixed asset investments in 2014 with an increase of 13% for grid investment, while actual investment in the grid was less than 5% in the first five months of this year. If the corporation achieves its goal, it will become the key source of consumption in H2.

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

Xu: With regard to the copper price trend in H2, it is certain the US economy will improve steadily with global capital returning to the US market, and the US dollar will be strong again, which will depress the long-term trend of copper prices. Moreover, if pro-growth policies fail to support the weak recovery in the Chinese economy, consumption in the copper market is unlikely to be significantly enhanced. Given this situation, I think copper price trends will still be weak in H2, 2014.