1.there are four stages to the rise of copper prices in 2020

The copper sector fell to a five-year low in late March under the impact of the 2020 epidemic in the third round of the rally, and then broke through a seven-year high in December, a process that fully reflects its dual nature of commodity and financial prices, both commodity attributes correspond to copper supply and demand fundamentals, while financial attributes reflect inflation expectations and the strength of the pricing currency, the dollar. We Split 2020-2020 into four phases, with the copper sector following three distinct cycles of gains in copper prices. 1) Phase 1: Global Capital Markets Rally in response to the outbreak and panic (mid-january-end-march). Financial markets were Selling climax, with copper trading at a five-year low of $4,630 a tonne at the end of March, under the double-click of commodities and financial attributes. 2) Phase II: fundamentals-driven and macro-oriented economic recovery (april-end-june). Copper prices quickly rebounded to $6,039 a tonne, with total social inventories falling from a year high of 867,000 tonnes in March to 371,000 tonnes at the end of June, as the country's new crown disease was largely contained and accompanied by a massive policy stimulus. At the end of June, copper equity experienced its first significant rally following the great cycle (28.68 per cent from June 30 to July 9) . 3) PHASE III: stronger exports and a weaker dollar (july-mid-october). On the demand side, overseas demand recovered and China's export orders increased significantly. The US election created uncertainty, with negotiations over a new economic rescue package suspended, and the dollar index accelerated on the strength of the euro, with copper trading up slightly to $6,713 a tonne on the back of a weak dollar. 4) phase 4: Improved global epidemic and rising inflation expectations (november-to date). A NEW $190m economic plan for the US is largely on the ground, with the vaccine expected and the US election secured. On the macro side, inflation expectations, as represented by the 10-year US debt break-even ratio, climbed to 1.98 per cent at the end of the year from 1.7 per cent in early November, the dollar index fell from 94 in November to 89.9 in 2021 and the LME copper price hit $8,000 a tonne in the second significant rally in the copper sector in November (up 13.32 per cent from November 2 to December 2) . Saudi Arabia will voluntarily slash production in February and March as part of a New Year of OPEC production cuts on Jan. 5. U.S. oil production has fallen by nearly a third because of the coldest weather in 30 years, sending crude oil prices soaring past the $60 Brent Crude mark and briefly touching $65 a barrel, pushing copper prices up to $9,100 a ton, with crude and copper showing a very strong synchronicity. The 2021 saw a third significant rally in the copper sector in February (the 2021 rose 12.89 per cent on February 8 and 23)

From the equity end of the observation, in 2020, the copper plate outperformed the market by 28% . Among them, Zijin Mining Industry, Western mining industry and Luoyang Molybdenum Industry, which are expected to increase their output, have achieved significant excess returns, while Jiangxi Copper Industry, Yunnan Copper Industry and Tongling nonferrous metals industry, which are not expected to increase their output, have lost. Zijin mining after 2015-2019, the acquisition of resources and mine construction, in 2020 in the thick thin hair node, the year beat the market by a wide margin of 85% . The copper sector has maintained its strength since 2021, outperforming the market by 34% . Minmetals resources, Jiangxi Copper Industry and Tongling nonferrous metals added strongly, but Zijin mining and western mining outperformed the copper sector, reflect the market for the leading companies phase of high valuation of digestion.

II. Copper supply-demand mismatch may continue in the first half of 2021

2.1. The tight pattern at the end of the copper mine remains unchanged

The world's copper resources are mainly concentrated in Chile, Peru and other countries, mining, smelting capacity is relatively concentrated. In 2019, Chile and Peru had 200 million and 87 million tons of copper reserves and 5.6 million and 2.4 million tons of production respectively, ranking first and second in the world, accounting for 33 percent of the world's reserves and 39 percent of production, according to USGS data. In 2019, China's mining copper reserves stood at 26 million tons, accounting for 3 percent of the total, with 1.6 million tons of production, accounting for 8 percent.

According to ICSG data, in 2020, the world's total mineral copper output reached 20.66 million tons, 28 major global mineral copper companies accounted for 72.6 percent of the total capacity is relatively concentrated. In the next two years, the increase and expansion of copper production will mainly come from BHP Billiton, freeport, Zijin mining and western mining. Among them, the production of copper is expected to increase from 370,000 tons in 2019 to about 800,000 tons in 2022 with the successive commissioning of the kakura-kamoa copper mine, the Timok copper mine and the qulong copper mine, its copper output is expected to rise from 4.9 m tonnes in 2019 to 180,000 tonnes in 2022.

In 2021/2022, the world's major copper mines are expected to increase production by 1.64 million tons/1.269 million tons, with a relatively large increase in capacity. However, we should note that historically the copper mines have also had a relatively high disturbance rate. According to Woodmac, the average disturbance rate from 2004 to 2020 was about 5.4 percent. In the light of the current macro environment, we believe that the 2021 factors mainly include the following:

1) most of the new 2021 production is in Latin America and Africa, where we estimate it will account for 52% and 17% of the increase in 2021, respectively. Even if the developed world starts vaccinating, the vaccine may not reach the developing world this year. Recent virus mutation in South Africa, Latin America, Africa and other places in the future outbreak control or there are still risks. Even if the impact of the epidemic gradually receded, the completion and commissioning of major projects to full production still needs a capacity climbing process.

2) there have been a number of strikes at copper mines in recent years, such as Escondida and Candelaria. Combined with the new output of major mines in the next two years and interference factors, the total output of global copper producers is predicted to be 21.64/22.39 million tons in 2021-2022, an increase of 4.7% and 3.5% year-on-year. The global refined copper production in 2021-2022 is estimated to be 25.41 million tons and 26.3 million tons respectively. (1) according to the ICSG, the global primary refined copper production accounts for about 97.5% of the global mineral copper production, assuming that this proportion will continue in 2021-2022, and according to the forecast data of the global total mineral copper production in the next two years, the global primary refined copper production in 2021-2022 is estimated to be 2109/2183 million tons respectively. (2) assuming that primary refined copper accounts for 83% of the world's refined copper production, we estimate that global refined copper production in 2021-2022 will be 25.41 and 26.3 million tons, respectively.

According to the above analysis, 2020 under the new crown disease has a restraining effect on the capacity release of the copper mine under construction, and the planned capacity is expected to be concentrated in the 2021, along with the overseas economic recovery under the control of the 2021 disease, global production of mineral copper and refined copper is expected to return to growth in 2021-2022, with growth in 2021 capacity at a phased high.

The new output of the major mines at home and abroad in 2021 may be mainly concentrated in the second half of the year, the first half of the year: the second half = 3:7. The 2021 added about 599,000 tons of copper production to its new mines and to the old mine's technological transformation and expansion project, but Chile's 2021 and BHP Billiton have lowered their forecasts for copper production because of ageing mines and declining ore grades, increasing global production by 422,000 tonnes compared with 2020. According to the calculation of the production progress of the newly built mines, the increase of copper production in the first half of the 2021 was about 201,000 tons, and the increase of copper production in the second half of the year was about 398,000 tons, most of the new output growth was in the second half of 2021.

The supply side of the disturbance factors in the scrap copper imports have limited impact on the trend. On October 19,2020, the state announced that renewable copper materials meeting the specifications could be freely imported, but the announcement imposed strict restrictions on the content of imported scrap copper. The copper content of regenerated red copper shall not be less than 94% , and the brass content of regenerated brass shall not be less than 95% . Therefore, although scrap copper can be imported freely to a certain extent, but import standards have been raised accordingly, we expect that the total volume of scrap copper imports will remain relatively limited.

2.2 A pick up in demand is expected to drive copper inventories lower

Supply side disruptions in South America will affect domestic supplies at least in March and even April, dampening the inflow of imported copper, leaving global dominant inventories at historically low levels. Shanghai copper stocks rose 47.67 percent on Feb. 19 from a low at the end of January. Stocks of cathode copper rose more in the previous period, mainly due to the rapid rise in prices and the difficulty of downstream processing plants to place large orders due to terminal high sentiment, the lower than expected rate of start-up and reluctance to buy large quantities of raw materials at a time when copper prices are rising so fast led to a discount of 250 yuan per tonne on the spot market last week. The continued weakness in the lower reaches of the river may cause the market to exceed expectations. If the social inventory exceeds expectations, it will give a certain negative feedback to the copper price, but overall copper inventories remain at low levels.

China's demand is expected to continue to recover into the high season in March, providing momentum for copper price stabilisation. With the two sessions approaching, it is expected that the central government's policies on new infrastructure, carbon neutrality and other issues will once again drive copper consumption in the 14th five-year plan. Short-term domestic supply and demand structure still exists a certain gap to support copper prices, supply and demand mismatch is expected to continue throughout the second quarter.

3. the upward revision of inflation expectations will promote copper prices to stabilize the upward

At this point in time, we believe that copper prices have entered a new upward cycle, the follow-up will continue to be driven by two main factors: 1) demand-driven supply shortage pattern of electrolytic copper; 2) weak dollar (in dollar terms) and upward pressure on inflation, copper currency attributes to the price of the promotion. Due to the recent copper price adjustment, the market for the follow-up copper prices and copper plate movements have also had differences, but we think copper prices and copper plate is expected to shake up after stabilisation.

3.1. Inflation expectations are expected to continue to push up copper prices

At the end of February, LME copper prices fell below $9,000 a tonne, from a high of $9,617 a tonne to $8,994 a tonne. For the recent correction, we believe that the first reason for the capital outflows from emerging markets was the dollar's appreciation driving the dollar back At the same time, due to the rise in US bond yields, the market expects inflation expectations to rise against the background of rising commodity prices. Imported inflationary pressures have led the market to expect an accelerated shift in monetary policy. However, from the current stance of monetary policy in the US and Europe, dollar liquidity continues to flood, which makes the financial properties of copper did not significantly cool.

According to the Fed's model, the nominal interest rate (the 10-year treasury bill rate) is broken down into the sum of the real interest rate, the expected inflation and the inflation risk premium, and the recent convergence of treasury yields as 2021 real interest rates fall to negative levels in January, reflecting rising inflation expectations. Inflation expectations are highly correlated with copper prices and are expected to rise most rapidly in 2021, with upward revisions likely to continue, and once inflation expectations continue to rise, the driving force for copper prices will be much stronger again.

From the observation of the leading indicators associated with copper prices, there is a certain correlation between the new PMI orders and the copper index. There have been three PMI new order peaks in May 2007, January 2010 and October 2017, china's PMI new orders topped copper and aluminum prices for 7-13 months. The correlation between new orders from China and the global PMI is strong, with the most recent peaks in November 2020 followed by two consecutive month-on-month declines in January and February of 2021. From the historical correlation with PMI new orders, copper prices may peak in the second half of 2021. There is a certain correlation between the M1 and M2 growth rate differentials in China and the price of copper in the last 15 years. The explanation of the M1 and M2 growth rate differentials in China is stronger than the combined values of the world's five largest economies (US, Japan, Europe, China and UK) (3) the gap between China's M1 and M2 growth rates tends to be higher for metals as they pass near zero on the way down, as was evident in late 2010 and early 2018. The 5.3% gap between China's M1 and M2 growth rates in 2021, the highest since February 2018, is still on an upward trajectory and, from that perspective, is also bullish for copper prices.

3.2. Later, copper prices are expected to show a first-after-rising trend

Taking into account liquidity, supply and demand fundamentals, inventory and other factors, we believe that the recent staged adjustment in copper prices will still go up.

1. Supply side: COPPER TC costs continued to decline trend, copper concentrate supply is still tight. 2. Demand Side: the short-term power of electrolytic copper demand mainly comes from the replenishment cycle of the overseas market, the repair of the overseas demand after the new crown epidemic receded, and the medium-and long-term situation under the global carbon-neutral background, copper as the main raw material will benefit from new energy and electric vehicles to speed up. 3. INVENTORIES: Copper inventories rose in the short term and remain at historic lows. 4. LIQUIDITY: overseas, with the passage of the US $1.9 trillion stimulus bill in the House of Representatives, the Federal Reserve has said at this stage that it will not voluntarily reduce liquidity; domestically, with persistent inflation overseas, domestic is expected to continue the "tight credit, stable currency" policy. 5. Inflation: The upward revision in inflation expectations is expected to continue.

It is expected that the overall copper price in March will show a first-after-rising trend. Recently, the four major futures exchanges issued risk warning letters, requesting brokerage firms to increase margin and increase or decrease margin, and to strengthen investor education, mainly in response to the excessive rise in copper prices after the Spring Festival, driven by speculative funds, the recent copper price falls in the short term to the overheated speculative market temperature, is conducive to squeeze out the market bubble, the copper price in the high correction finishing will gradually make the downstream buying return, is conducive to promoting a benign slow rise in copper prices. Overall, in the fundamentals and macro-resonance, copper prices are expected to show a first-after-rising trend in March, driving the entire industrial chain back to sound development. According to the trend of expected inflation and the transmission of copper price to demand side in the second quarter, there are three scenarios: pessimistic, neutral and optimistic. The average price of 2021 LME copper is expected to be $7,000/ton and $9,000/ton under the pessimistic forecast, the optimistic forecast is $10,000 a tonne.

4. Investment Advice

With the rising price of copper and the sustained high level of the characteristics of the copper industry chain, it is most beneficial for the enterprises that master high-quality resources at the end of the mine, and at the same time for the leading enterprises that have their own growth, is expected to enjoy higher prices for a longer period of profit growth and performance flexibility.

5. Risks suggest a weaker than expected global economic recovery, a weaker than expected copper demand side, changes in the Federal Reserve's monetary policy, and a sharp tightening in liquidity. 

Source: the Huabao Treasure Cube

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