The supply and demand of the global refined copper market has experienced a structural reversal since 2018, from the tight balance of supply and demand for several years to the phased amplification of the supply gap. The lag of global mining expenditure affected by the subprime mortgage crisis and the Chinese government’s continuous policy of environmental protection and elimination of backward production capacity since 2015 have made the supply of new production capacity in the metal industry more standardized and rigid, while the demand side has experienced the extreme pressure test of Sino US trade disputes, epidemic impact and global macro and fiscal stimulus. At present, the global copper market is still in the mismatch stage of supply rigidity and demand toughness. The contradiction between copper supply and demand can also be confirmed by the continuous low global explicit inventory in recent two years.
The supply and demand structure of global refined copper will enter a deterministic supply shortage state in 2020. It is expected that it will be difficult to break the tight balance between supply and demand by 2023. The substantial peak of mine side supply has weakened since the post subprime mortgage crisis. The epidemic impact and continuous diffusion in 2020 have exacerbated the contraction of the actual effective operating rate of global mining enterprises and the lag of mine side production projects, resulting in the average annual output growth rate of global copper mines in 2020-2023 is only 1.21%, which has been reflected by the continuously low TC price in recent two years. The global copper demand is included in the continuous expansion trend again after the impact of extreme contraction. Thanks to the positive fiscal policy and loose monetary policy of the economies dominated by China, the global industrial production index continued to enlarge after the extreme contraction, and promoted the switching of the industrial inventory cycle from passive replenishment to active replenishment, thus driving the continuous release of the demand for industrial products dominated by copper from Q2 in 2020. We believe that the high base effect of the world’s major copper consuming economies and the new energy infrastructure brought about by the global energy structure switching have played a supporting and stimulating role in copper consumption, which means that copper demand will enter a period of cyclical expansion again, and implies that the contradiction between supply rigidity and demand elasticity may continue, This means that the copper market will still be attractive for long capital allocation.
From 2020 to 2023, the global cumulative phased copper consumption may increase by 7.9% to 101.96 million tons. From 1992 to 2019, the average annual growth of global copper consumption (four-year period) was 4.06%, of which the overall consumption in 96-15 years maintained a benign growth level of about 3.2%, but it fell sharply to 1.9% due to the impact of the financial crisis in 2008-11, and then the consumption growth rate rose to 4% under the boost of low base and global quantitative easing, However, by 2016, with the gradual withdrawal of the global loose environment and the progress of China’s financial deleveraging (including de financing copper), the average growth rate returned to 1.3% again. For the copper consumption in 2020-2023, considering the reshaping of the global industrial chain inventory represented by copper and the continuous implementation of new energy infrastructure, we believe that the phased total copper consumption may increase by 7.9%, that is, the global cumulative copper consumption may increase to 101.95 million tons in 2020-2023.
China’s copper consumption market still has huge growth space. The consumption support for copper in the four industries of household appliances, transportation, construction and power investment will still exist. In addition, thanks to the industrial planning and policy support of the government, copper consumption still has large growth space and growth expectation. According to the sample data of the four industries in 2020, the copper consumption was 9.85 million tons, accounting for 70% of China’s total copper consumption of 14 million tons in 2020 (according to ICSG and WBMs); According to our estimation, the copper consumption of these four industries may increase by 2.865 million tons to 12.714 million tons (+ 29.1%) by 2025, which means that the annual CAGR of copper consumption mainly related to copper industry may reach 5.2%, and China’s total annual copper consumption may exceed 16 million tons at that time. With the support of green energy infrastructure, the growth rate of China’s refined copper consumption may remain above 4% from 2022, and the growth of China’s refined copper consumption may be significantly higher than that of the world (China’s average annual copper consumption growth rate of 4% and the global average annual copper consumption growth rate of 2.43% from 21 to 23). China’s share in global copper consumption will continue to increase.
The global copper price may still be in a strong stage from the perspective of discount and inventory indicators directly related to the price trend. The current copper premium in London and Shanghai showed an obvious trend of strengthening in 21q2, while the global dominant inventory decreased more significantly. The global dominant copper inventory has decreased from 633000 tons in 2020q1 to 181000 tons at present. Considering that the phased average values of inventory corresponding to the two rounds of copper price bottoms in recent 10 years are 375000 tons and 348000 tons respectively, this means that the current global dominant copper inventory has entered the dominant shortage state. Considering that the global dominant copper consumption is about 63000 tons / day, and the available days of global dominant inventory are less than 3 days, the change of dominant inventory of refined copper is still an important factor catalyzing the rise of copper price. We believe that the operating average price or split ratio of Lun copper and Shanghai copper in 2022 is 9500 and 72000, and the Shanghai Lun ratio may remain around 7.6-8.
Related companies: Zijin Mining Group Company Limited(601899) , Jiangxi Copper Company Limited(600362) , Yunnan Copper Co.Ltd(000878) , Jchx Mining Management Co.Ltd(603979) .
Risk tip: the US dollar has strengthened significantly, the global risk-free interest rate has risen sharply, systemic risks in emerging markets, the escalation of trade war, and the supply of copper mines has exceeded expectations.
