At the beginning of November, the macro environment of domestic and foreign copper markets changed. Domestically, as downward pressure on the economy increases, China emphasizes the effective implementation of policy pre-adjustment and fine-tuning; externally, the US Federal Reserve has officially announced the reduction of Qe, and the starting time is earlier than expected, which means that global monetary policy has officially reached an inflection point, the probability of future financing costs will rise slowly. In early November, the Fed’s meeting announced that interest rates would stay the same, but the timing of the QE cuts was earlier. I believe that the Fed may raise interest rates as early as the second quarter of 2022, the main reasons are as follows: First, the economic judgment is relatively optimistic. Economic activity and employment indicators continued to strengthen, with progress in vaccination campaigns and strong policy support, according to a statement released after the Fed’s meeting. US real GDP growth has slowed markedly and economic activity is constrained by supply constraints and bottlenecks, fed chairman Powell said. But growth should pick up in the fourth quarter as the new crown wears off, and is expected to be strong this year. The second is that inflationary pressures are still underestimated. The Fed statement said the high rate of inflation mainly reflects expectations that are temporary. The imbalance between supply and demand associated with the outbreak and the reopening of the economy has contributed to sharp price rises in some areas. That means the Fed still thinks inflation is temporary, but has added a “Forecast”to previous meetings, suggesting it is less confident that inflation is temporary. “Inflation is rising strongly, but there is no evidence of a spiral of wage increases that is expected to come down in the second or third quarter of 2022,”Powell said at a news conference. Future inflation is hard to predict, and the timing remains uncertain. But we believe that as the economy adjusts, inflation will fall to close to the 2 percent target,”the statement said, powell wants inflation to move as they expect, otherwise it will mean a major shift in monetary policy in the future, and the Fed’s miscalculation of inflation could have a very negative effect on the economy and monetary policy in the future, could be stuck in the stagflation crisis of the 1970s. Powell also said the Fed’s policy tools could not ease supply constraints.

Third, the Fed is trying to avoid signaling an increase in interest rates, but the increase may not be due to the Fed will, because of inflation pressure on the Fed’s judgment on inflation. Powell said the timing of the Fed’s announcement that it had begun to scale back its bond purchases was not a direct signal to raise interest rates. The focus of the meeting was on buying less debt, not raising interest rates. Now is not the time to raise interest rates. This means that the Fed is still struggling to avoid a financial market shock from premature rate increases and says the job market has not improved enough to raise rates, Powell said, the current unemployment rate overestimates the recovery in the labor market and may lead to full employment by 2022, but the Federal Reserve does not define full employment. Fourth, the improvement of the job market and wage growth further exacerbated U. S. inflationary pressures. The Fed also faces a “Price and wage”spiral as it tries to determine whether wage increases are due to productivity gains or to the disconnect between the job market and available labour. The former is seen as a positive sign for economic development, while the latter may increase the risk of inflation. Data released by the United States Department of Labor showed that U.S. nonfarm payrolls rose 531,000 in October, far exceeding market expectations of 450,000, the biggest increase since July. The figures for August and September were also revised upwards, with non-farm payrolls rising from 366,000 to 483,000 in August and 312,000 from 194,000 in September. After the increase, non-farm payrolls rose by an average of 235,000 per month over the past three months. Notably, average hourly wages in the US non-farm sector rose 4.9 per cent in October from a year earlier, the biggest increase since February. The Fed will be forced to raise interest rates if the epidemic does not return US employment to pre-epidemic levels and structural labour shortages boost wage growth, keeping inflation high for a long time, sTAGFLATION will return in the 1970s. Overall, the Fed cut QE earlier than expected, with the market expected to announce cuts in November and only formally in January 2022. As a result, the perceived inflationary pressures have given the Fed a sense of urgency in controlling inflation. If inflation does not fall significantly in the fourth quarter, it does not rule out accelerating QE cuts in January and raising interest rates early in the second quarter. As well as relying on the removal of supply-side constraints, the future decline in inflation will also require structural changes on the demand side, namely, a further weakening of the substitution effect of the consumption of goods for the consumption of services, and easing of price pressures on goods, and the price of service consumption does not rise obviously when the service supply picks up. From the point of view of the development of the epidemic, supply chain recovery in 2022 is likely to be slow, and labor costs will continue to rise, which means that the pace of future fed monetary tightening will accelerate, especially interest rate increases may come ahead of schedule.

There has been no significant short-term change in the supply side of the micro-supply and demand in the copper market. The processing fees for imported copper concentrates are at a high level of US $58-63 per ton during the year, while the processing fees for crude copper remain relatively high, including the price of sulphuric acid, this means that the domestic copper smelting enterprise profits are still considerable. But the domestic industrial and commercial electricity price increases, the impact on copper smelting is not big, for copper processing enterprises. At present, the most important reason for copper prices to remain high is that global refined copper inventories remain low as a result of a slower-than-expected recovery in supply. Copper inventories fell again in the week ending November 5, down 11,845 tonnes from the previous week to 37,482 tonnes. In addition, copper deliveries to LME warehouses in Chile have been affected by strikes and a contraction in the country’s copper output as a result of the impact of the epidemic, including continued movements of commodities traders and investment banks such as Trafigura into LME warehouses, lME inventories continued to fall to 123,000 tonnes on November 5 as write-off orders for copper remained high. The weaker-than-expected recovery in both financial capital and real supply led to a drop in global dominant copper inventories to 214,000 tonnes in the week to November 5. In the third quarter, Codelco produced 389,000 tonnes of copper, down 7.6 per cent from the same period last year, largely because of the Andina strike and the epidemic. In addition, Chile’s copper production in September fell to its worst monthly record since February, to 451,130 tonnes, down 6.9 per cent year-on-year and 3.4 per cent month-on-month from August, on the back of frequent strikes by workers and a drop in ore grade. On the demand side, domestic copper rod processing costs did not change much from October, copper pipe and copper strip consumption began to enter the seasonal off-season, only copper foil demand performance. However, in the third quarter, power battery companies, including Jády, saw their net profits fall sharply from a year earlier, which could lead to future production cuts as battery companies struggle to raise prices, copper foil consumption is likely to weaken periodically in the fourth quarter. New Energy, the first three quarters of photovoltaic installed capacity less than expected, mainly photovoltaic components in the cost of raw materials prices rose sharply in the case also in the rising ship. In mid October, for example, the second phase of the CGN New Energy project in Taishan, Guangdong, opened for bidding, with 11 component companies participating. The remaining 10 companies quoted prices of more than 2 yuan per watt, with the highest price of 2.208 yuan per watt, with an average price of about 2.1 yuan per watt, up 50 percent from the same period last year.

Market forecasts domestic policy fine-tuning does not mean re-support or stimulus to real estate. The acceleration of special debt issuance is mainly to smooth the downward slope of the economy. The key is that the profits of downstream manufacturing industries are squeezed by the high level of raw materials, demand will continue to shrink in the future. The Fed’s earlier-than-expected announcement of a reduction in QE also marks a formal turning point in global monetary policy, with the probability of future funding costs rising slowly. The dollar’s risk-free interest rate is likely to continue to rise despite the high inflation it did not face in the last round. Copper Market Micro supply and demand has not yet changed significantly, but the downstream end manufacturing and new energy companies are experiencing unprecedented raw material cost transmission pressure, the future demand is likely to weaken further. The supply-side contraction is likely to continue as power brownouts ease and overseas supplies of copper concentrates and crude copper resume. In the short term, copper prices are likely to continue to fall, as inventories are low and overseas capital is piling into positions, slowing the pace of decline. Historically, copper prices have reacted ahead of time from economic highs to downturns, but because of the disruption to supply chains caused by the outbreak, global dominant copper inventories were low, leading to weak demand and not causing a sharp drop in copper prices for the time being, the future needs to pay attention to the supply and demand side of copper strength changes. The speculative nature of commodities such as copper could cool significantly after the Fed’s monetary tightening. At present, there are downside risks to China’s economy, but the tone of “No speculation in housing”will not change. Low real estate growth in the long cycle is the general trend, making the probability of commodity demand weakening in the next quarter or two, but the difference is that the current supply-side constraint is unlikely to expand as much as it did in 2014-2015. Therefore, I believe that copper and other commodities prices in the future downward adjustment is still possible. 

Source: Non-ferrous metal, by Cheng Xiaoyong

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