Copper prices have shown a downward trend since the beginning of the year. COMEX copper prices took 3 months from the beginning of the year to take up all the gains in December of the end of last year. The callback rate was 11.5%, which was subsequently restored in April. Sexual rebound, Shanghai copper trend and COMEX copper similar. Expectations of pessimism, increased supply, stockpiling, and the impact of the external environment (such as trade wars) are all detrimental to the operation of copper prices. However, with the passage of time, the external environment and endogenous factors of copper are changing. From the marginal point of view, the most difficult moment of copper price may have passed.

1. What is the price of the copper price correction?

The overall correction of copper prices can be understood in several ways:

First, look down on China's total demand from the traditional "troika" perspective;

Second, the United States is expected to lose its infrastructure;

Third, the "pick-jump reaction" (impacting risk assets) formed by the impulsive rise of US inflation (PCE) on interest rates;

Fourth, the impact of trade friction on market risk appetite;

V. Increase in the supply of refined copper in China;

6. The accumulation of refined copper stocks at home and abroad (both COMEX and SHFE stocks are increasing). Looking into the future, however, we believe there is a higher probability of marginal improvement in these areas.

2. The most tense moment of trade friction has passed

We can divide trade friction into four levels: the first level, taxing individual species; the second level, expanding

Taxation scope and negotiation concessions; the third level, taxation on major trade varieties; the fourth level, the use of bonds, foreign exchange and other foreign trade tools.

At present, trade frictions still remain between the second and third levels. Both parties only list the taxation lists and do not comprehensively introduce taxation measures. The impact of trade frictions on copper prices remains at the expected level and does not cause substantial supply and demand. influences. U.S. Finance Minister Nuchin has recently expressed his willingness to visit China to negotiate trade matters. If progress is made in later negotiations, the risk of trade frictions will gradually recede, and market risk appetite will pick up, which is good news for copper prices.

3. Copper mine interference may not be as expected but still tight

Since the beginning of this year so far, the global copper production has resumed beyond expectations. Zambia, Chile and other countries have experienced significant growth in copper concentrate production. Among them, Chile's growth was mainly due to the expected increase in production of Escondida. The output of the mine in January this year was 107,000 tons, an increase of 38.78% year-on-year, and a decrease of 16.8% over the same period of last year. It is expected that the mine will be affected by the absence of strike and other factors in 2018. The output will likely reach 1.28 million tons, which is higher than the output of 925,400 tons in 2017 and will continue to support Chile's copper production in 2018.

In terms of the interference rate of copper mines, more than 40 labor unions in Chile face the expiry of the labor agreement this year, including Escondida’s contract will expire in June, so the market generally raised the expectation of the copper mine interference rate this year. However, Chile’s main copper mine previously agreed or reached a labor agreement, which corresponds to a production volume of approximately 2.4 million tons, accounting for approximately 40% of the total output of the mines due to labor contracts. In addition, with the smooth progress of labor negotiation in large-scale mines, the possibility of a large-scale strike again in the later period is relatively small. This year, the global copper concentrate supply and demand conditions have eased. However, due to China's new crude capacity in the past two years, the copper concentrate will still be tight. From the balance sheet point of view, even if the copper mine interference rate is lowered, this year's copper concentrate may not be a pile of inventory. pattern.

4. Domestic high output of refined copper production is not sustainable

According to the Shanghai Nonferrous Metals Network, China's refined copper production was 2.188.5 million tons in the first three months of this year, an increase of 11% over the same period of last year. The main reason for rapid growth in supply was the release of new production capacity in 2017 and 2018. In the first quarter of this year alone, there were 2 copper companies in the country with new production capacity, namely 150,000 tons of Chinese gold and 100,000 tons of Lingbao gold. Currently, the utilization rate of new production capacity of these two companies has climbed to over 75%, which is one of the main driving forces for the growth of copper supply. In the later period, many companies such as Chinalco Southeast Copper, Shandong Hengbang and Yantai Guorun have new capacity to put in.

However, this year's overall growth in the supply of refined copper may not be maintained at a high level of over 10%. We believe that the decline in the growth rate of supply in the latter period is a high probability event. Mainly based on: First, the decline in copper concentrate processing fees is a constraint on capacity utilization of smelters. Currently, the processing fees for copper concentrates in May and June have already dropped to US$73.5/tonne, while US$70/tonne is the average processing cost for domestic smelters. Therefore, if TCs continue to decline in the later period, there is a high probability that the supply of domestic smelting companies will be formed. Constraints; Second, domestic refined copper production in 2017 showed a pattern of high in the second half of the first half of the year. In other words, for the growth of refined copper supply in 2018, the base effect has a big difference in the first half of the year. We believe that as the TC's decline affects the supply constraints of smelters and the effect of the base effect in the second half of the year, the decline in the supply of refined copper supply after June this year is a large probability. It is a marginal benefit for copper supply.

5. Scrap copper supply meets expectations

Another point of copper supply this year is scrap copper. At present, the ninth batch of approved scrap copper import approvals has been published. At present, the cumulative approved scrap copper quotas from 1-9 batches totaled 337,949 tons, a year-on-year decrease of 87.4%, in line with market expectations. From January to March, actual import of scrap copper was 550,000 tons, which was nearly 40% lower than the same period of last year. From the standpoint of refined waste price difference, the spread between the two products continued to converge, indicating that the supply of scrap copper was tight, resulting in many smelting companies using scrap copper as raw materials. The utilization rate of the smelting enterprises was restrained and led to the use of scrap as raw material. Copper processing companies have turned to refined copper as raw materials to increase the demand for refined copper in disguise. In general, the current situation of scrap copper is in line with expectations.

6. Consumption may exceed expectations

The decline in copper prices in January-March was closely related to the previous market's bearish view of domestic and overseas demand. In particular, domestic investors are more pessimistic about total domestic demand in 2018. However, we believe that this year's demand should not be too pessimistic, and it is possible that there will be an unexpected situation at the demand level.

At the just-concluded Politburo meeting, the central government proposed to continue to expand domestic demand while maintaining a “tough battle” while maintaining reasonable liquidity. We have already seen that the real estate data for January-March exceeded market expectations. In terms of infrastructure, after the inspection of PPP projects gradually ended in the first half of the year, those PPP projects with healthy funds and good quality in the second half of the year may return. Therefore, in the context of continued expansion of domestic demand, we may see a marginal improvement in infrastructure and real estate. Therefore, from the perspective of the traditional troika, it should not be pessimistic about the total demand.

From the perspective of liquidity, the words “keeping the liquidity gate” have been removed, and liquidity tightening is not the only way to deleverage. There are many indications that there is a general framework for a stable and neutral liquidity. Next, there is room for marginal improvement.

From the microscopic demand of copper, we have exchanges and contacts with many downstream companies and found that the downstream consumption situation is good this year. For example, the orders and copper consumption of wire and cable companies are basically the same as last year and no significant decline has occurred. We believe domestic copper will remain in inventory within the next 2-3 months.

7. Summary and Strategy

In a nutshell, the most difficult time for copper may have passed. The external environment, such as trade warfare, has gradually eased. Overseas inflation expectations have risen overall. Crude oil prices have continued to rise. Long-term US Treasury yields have broken 3%; Presenting a strong “toughness”, liquidity may have the potential to improve marginally under a neutral framework. In terms of its own fundamentals, although the copper ore interference rate is less than expected, the overall copper concentrate is still not very loose, and the growth of refined copper supply will remain at a high level in the short term, but there is a large probability of decline in the later period, and the downstream consumer side is also relatively healthy. At present, it seems that it is still sustainable, and domestic stock turning point has emerged.

Therefore, we believe that in this context, the price of copper will rise slowly in May after undergoing a recovery in April. Under this kind of pre-judgment, the callback on futures is a tactic that can be considered, and on options, it is possible to consider the strategy of buying an out-of-the-money call option that expires in June or July.