ABSTRACT: At the two sessions of the National People's Congress this year, the goal of "carbon peak, carbon neutrality" was formally established, "new infrastructure" became the key direction, the copper as the symbol of the traditional industries such as transportation and construction, ushered in new challenges and opportunities.

Copper, as a leading commodity, has long been dominated by commodity attributes. However, with the influence of such important factors as macro-economy, liquidity and inflation, it also has financial attributes. Entering the new era of Digital Economy, in the dual property of copper, its commodity property is weakened, but its financial property is beginning to stand out.

At this year's national two sessions, the "carbon peak, carbon neutral" target was formally established, "new infrastructure" became the focus direction, the copper as the symbol of the traditional industries such as transport and construction, ushered in new challenges and opportunities. In this context, copper supply and demand pattern has changed? What is the relationship with the goal of "carbon peak, carbon neutrality" ? Where are the challenges and opportunities for the future?

Recently, the Securities Daily reporter learned from interviews with a number of financial institutions that they generally agree that the commodity role of copper has been redefined, and at the same time, based on the impact of monetary policy, global liquidity and inflation expectations, in order to achieve the goal of "carbon peak and carbon neutrality" , copper, aluminum, lead, lithium, cobalt and other Non-ferrous metal will meet new challenges and opportunities in the process of changing energy production and consumption structure Short-term view of finance, medium-term view of "new infrastructure" support, and long-term view of "carbon peak, carbon neutral" bring new opportunities, will become the future trend of copper prices.

1. The proportion of financial attributes has increased, analysts say

As a widely used and abundant industrial product, the price of copper is influenced by supply and demand and inventory for a long time. However, in the era of Digital Economy, digital infrastructure has become the key direction of industrial development, and production factors have changed from capital and technology to data, the "new infrastructure" led by 5G, for example, will "brain" the traditional infrastructure. Analysts say the acceleration of digital infrastructure will alter the structure of supply and demand that drives copper, aluminum and Non-ferrous metal, while macro policy, global liquidity and inflation expectations will all play a role, the financial attributes to which copper is ascribed will also come to dominate.

Xie Dongxu, manager of Guozheng nonferrous index of Cathay Fund, told Securities Daily that with the rapid development of the financial market and the global economic integration, the global pricing commodities represented by copper are becoming more and more strong in their financial attributes, even under the price shock caused by liquidity factor, the price fluctuation will override the supply-demand relationship of the commodity itself. "With the advent of the digital economy, global liquid assets under the auspices of the Internet, capital investment efficiency and leverage have increased, and Non-ferrous metal commodity prices have fluctuated. At the same time, behind the digital economy boom is the rise of the Internet and consumer electronics, and the demand for copper in the global economy has also changed. "

In fact, like other globally priced commodities, copper prices are determined by both commodity and financial attributes, but in the case of commodities, the commodity attributes of Non-ferrous metal are closely related to the economic cycle, when the economy is in a boom, market demand for industrial metals is strong and weak during recessions; in terms of financial attributes, when the economy is depressed or the outlook is gloomy, the flood of liquidity unleashed to fight the recession will still send Non-ferrous metal prices soaring.

Generally speaking, the upward trend of liquidity-driven commodities will continue until economic growth returns to normal, until liquidity turns, Xie said. Thus, while final industrial demand is not identical, copper-led commodities are more positively correlated in economic cycles due to the commonality of financial attributes and commodity demand.

Tang Pei, a researcher at Non-ferrous metal, told securities daily that in the digital economy era, the key factors of production have shifted from capital and technology in the traditional industrial economy era to data, the "new infrastructure" , led by 5G, will put a "brain" on the old infrastructure. The acceleration of digital infrastructure will drive incremental demand for copper clad Non-ferrous metal, aluminum alloys, and the like.

Cheng Xiaoyong, director of the POSǒNG 見(jiàn) Boseong Institute of Futures Finance, told the securities daily that China's economy has entered an era of digital economy as well as a green economy. The economy may shift from the traditional "coal and oil economy" to the "electricity economy" , new Demand for new energy sources such as photovoltaic, wind power and electric vehicles will come from the copper led Non-ferrous metal. From the financial attribute, under the epidemic situation, the global economy implements the loose monetary policy, the financial attribute of copper has been strengthened. "over the next 10 years, China's digital economy will become less reliant on traditional investment sectors, the new economy and new business forms will be accompanied by low growth in the economy, the elasticity of Non-ferrous metal supply and demand will both decline, and the commodity nature will be weaker than the financial nature for a long time. "

Zhang Xi, non-ferrous analyst at Huishang Futures, also told the securities daily that looking back on the current rally in copper prices, the fundamentals have not changed significantly, so we need to review the current rally in copper prices, much of this is due to the strengthening of financial attributes, such as the $1,900 BN fiscal stimulus in the US, which set off a new round of euphoria in global capital markets and a surge in copper prices.

2. Commodity prices have risen above pre-epidemic levels

Global commodities have entered a new cycle of price increases since April last year. According to the International Monetary Fund's Commodity Price Index, the index of all commodities rose 67 per cent last year, with the energy index up 172 per cent, the copper index up 67 per cent and the iron ore index up 94 per cent. So far, global prices of major commodities have been significantly higher than pre-epidemic levels.

Ping an securities chief economist Zhong Zhengsheng said that this round of commodity cycle can be attributed to three reasons: First, financial attributes. After the outbreak of the global loose monetary environment, the United States dollar depreciation, commodity prices rise ship high; second, economic attributes. The global economy recovered after the epidemic, real demand for commodities resumed, and commodity prices rose in a period of supply and demand conflict. Global Environmental Policies and infrastructure measures have generated new demand for some commodities, further driving up commodity prices, such as new energy and Non-ferrous metal.

It is understood that copper prices in the economic cycle of the commodity attributes and financial attributes from time to time alternate. Recalling that during the recovery period from 2008 to 2011, copper prices rose sharply after a sharp fall and reached a new staged high, in line with the global financial crisis and the quantitative easing policies of the United States Federal Reserve during the period, since then, the economy has gradually repaired, monetary policy has been adjusted, copper prices are relatively stable. Since the outbreak last year, copper prices have remained highly synchronized under the impact of economic shocks and monetary policy adjustments.

Zhong Zhengsheng analysis that the current copper cycle and the first round of economic recovery has a high similarity, copper prices are expected to rise in the volatility. On the one hand, economic growth will be positively boosted as the world pushes ahead with vaccinations. On the other hand, the Federal Reserve is not overly concerned about inflation at this stage, putting employment and economic recovery first, and monetary policy remains loose, the upside basis for copper prices is expected to remain. "The copper cycle is now in a similar position to the early stages of the recovery in the last cycle, with a recovery but on a shaky basis. Combined with the performance of the last copper cycle, the financial nature of copper is expected to prevail in the early stages of the economic recovery and prices will continue their upward trend, but US treasuries influence asset pricing and price volatility is likely to increase in the later stages."

Yan Dong, a fund manager in the quantitative and Derivatives Investment Department of Penghua Fund, told Securities Daily that there is still an upside opportunity for the follow-up Copper Price, which may occur in the second or third quarter. At present, the supply increment of the industry is still under control, new mineral production is relatively limited, and the core comes from the elasticity of demand; from the perspective of the economic cycle, the copper price still has a very strong upward opportunity before it reaches the recovery peak; from the perspective of the long-term cycle, the supply and demand gap for copper is expected to be even more pronounced in 20242025, with the core drivers of future copper demand growth mainly in sectors such as electric vehicles and photovoltaic, so long term copper prices are also relatively optimistic.

3. "New infrastructure" will drive incremental copper margins

This year's report on the work of the government proposes to expand domestic demand, expand consumption and launch a "new infrastructure" . Analysts believe that the "new infrastructure" will take into account both the short-term expansion of effective demand and the long-term expansion of effective supply, and will play an important role in stabilizing growth and employment, future infrastructure, including 5G infrastructure, new energy vehicle charging piles and other technological fields, will have a greater demand for Non-ferrous metal.

Xie Dongxu believes that the "new infrastructure" refers to the new-type infrastructure construction, mainly including the construction of 5G base stations, ultra-high voltage, inter-city high-speed railway and inter-city Rail Transit, new energy vehicle charging piles and other seven major areas. Electrification and intelligentization of energy supply is the premise of "new infrastructure" , and copper, as the best conductor material with the highest performance-price ratio, will benefit from the demand of copper in power equipment and new energy generation On the other hand, the electrification and intelligentization of transportation means will also greatly increase the demand for new energy raw materials such as copper.

"The implementation of new and old infrastructure projects and urban renewal projects will provide strong support for the demand for non-ferrous basic raw materials, and this demand-pulling effect has not weakened compared with last year, " Zhang said, new Energy vehicles and charging posts, construction of 5G base stations and UHV directly increase copper consumption in "new infrastructure" , but only about 1% of domestic copper consumption in the whole year. Intercity high-speed railway and Intercity Rail Transit directly benefit the investment of power grid and affect the demand of copper. At the same time, Industrial Internet and cloud computing big data center benefit the electronic consumption, thus promote the demand of CCL and indirectly benefit the consumption of copper.

Tong said the "new infrastructure" would drive incremental copper growth; "new infrastructure" had risen to the level of long-term national strategy, and new infrastructure projects were highly dependent on Non-ferrous metal, in the future, it is expected that the increase in Non-ferrous metal consumption brought about by the "new infrastructure" will replace the traditional terminal demand as the main force.

"At present, we still need to be cautious in judging the 'super cycle' of commodities, " Zhong said, adding that the outbreak would have a long-term impact on the global economy and that the pace and extent of the recovery in demand had a boundary; since this year, the logic of a weaker dollar was changing, this makes it harder to create a commodity supercycle. At the same time, the demand for commodities derived from the "green economy" is structural, and the development of the green economy itself means the crowding out of traditional energy sources, it increases the risk of future fluctuations and falls in the prices of commodities such as new energy metals.

Kang Daozhi, executive director of Dao Zhi investment, also told the securities daily that the loose monetary policy in the United States will tighten as vaccination advances, and the price of copper is highly correlated with the economic pattern brought about by the monetary policy, and the asset bubble formed by the overissuance of currency at any time there is a risk of collapse, will directly affect copper, crude oil led by the commodity, then may also face a sharp fall.

There are also foreign institutions that say the world could face a huge shortage of copper over the next decade. With the clean energy and transport sectors taking off, the copper industry will need to spend more than $100bn by 2030 to address a potential annual shortfall of 4.7 m tonnes, according to Cru. Meanwhile, Trafigura Group, the world's leading metals trader, said the potential shortfall could reach 10m tonnes without new mines. To make up the shortfall, it would need to build the equivalent of eight of the world's largest Escondida copper deposits in Chile.

4. "Carbon Peak, carbon-neutral" target, Non-ferrous metal demand to meet the opportunity

This year's government work report has officially set the goal of "carbon peak, carbon neutrality" . At the same time, it also heralds a new era of China's energy system, economic system and science and technology innovation system, all-round green transformation, in the process of achieving this goal, all walks of life will meet new difficulties and challenges, but at the same time, it will also bring major opportunities for scientific and technological innovation, energy and economic transformation.

Some experts point out that achieving "carbon neutral" means a revolutionary energy revolution, scientific and technological revolution and economic transformation. The areas covered by "carbon neutral" include not only energy, but also transportation, construction, industry and so on. The challenge is that China's energy demand has not yet reached the peak, industrial consumption is relatively high, transportation, industry, construction and other sectors of decarbonization technology still to be broken through. Among them, in the industrial sector, electrification and steel industry accounted for a higher proportion. "from the demand side, in order to achieve the goal of 'Carbon Peak, carbon neutral' , China's current energy production and consumption patterns will face a huge change, " Xie said, the electrification and centralization of production and transportation will be the long-term trend in the future. Therefore, in the process of energy production and consumption structure changes, whether it is the copper needed for power transmission equipment or the lithium, cobalt, nickel and other Non-ferrous metal needed for power batteries, will be in the process of moving towards "carbon neutrality" , play an important role in the demand side of industry. At the same time, on the supply side, how to save energy and reduce emissions of carbon dioxide and other pollutants during Non-ferrous metal mining, smelting, processing, etc. , it will also be a huge challenge for Non-ferrous metal in the production process.

Yan said that in the context of "Carbon Neutrality" , steel, the first major source of carbon emissions from the industrial sector, would bear the brunt of emissions cuts, with production cuts being the most effective. It is expected that the position of the steel industry in the black industrial chain will be promoted, the bargaining power of the main raw materials, especially iron ore, will be strengthened continuously, the restriction of raw material cost on the profits of steel enterprises will be weakened, and the profits of the industry will be promoted. The impact of "Carbon Neutrality" is mainly on the production and demand side of carbon emissions, but at the same time, the Non-ferrous metal industry will be open to opportunities in the trend.

Tang Pei believes that the supply of some metal varieties will be subject to the "carbon peak, carbon neutral" policy for a long time, especially those with high energy consumption and high carbon dioxide emissions, and metal enterprises will need to speed up green transformation and technological innovation in the future, large enterprises with complete energy-saving and emission-reducing facilities will have more market share. For example, industries that have a fossil-based electricity consumption structure will face energy structure optimization; in addition, under the "carbon peak, carbon-neutral" policy, new energy sources such as photovoltaic and wind power will gain attention, aluminum Strip with the advantages of lightweight energy will be further highlighted, "new energy" cars and charging piles continue to popularize, Non-ferrous metal demand will usher in a new opportunity.

Li Shao, a manager of the non-ferrous ETF fund in Chengdu Fund, told the Securities Daily that since the second quarter of last year, the national resumption and resumption of work took the lead. In particular, under the goal of "carbon neutrality, " the new energy automobile concept stock has exploded in all directions, the combination of Non-ferrous metal's financial and industrial attributes helped push stocks higher, with further infrastructure expansion plans expected to boost Non-ferrous metal prices, which are unlikely to change in the near term. "Carbon Peak, carbon neutral" is a problem for all industrial manufacturing industries in the future, but for the Non-ferrous metal, the opportunity lies in the need for new energy industries to develop into explosive periods, Cheng said, and New Energy is a new source of consumption growth for copper and Non-ferrous metal. The challenge is on the supply side. While not necessarily halting capacity expansion, carbon emissions will inevitably lead to higher costs because, on the one hand, they will be reduced by technological advances and equipment upgrades in processes such as smelting, some smelters, on the other hand, need to buy carbon credits. Zhang also believes that the rapid growth in sales of new energy vehicles will drive the development of the industry chain as global carbon emission standards tighten and new energy systems become more perfect, which will boost the copper, aluminum, nickel and other related Non-ferrous metal sectors. In determining the demand improvement, the supply elasticity is not high upstream industry chain will appear investment opportunities, such as new energy metals lithium, nickel, cobalt, aluminum, rare earth permanent magnets and so on will be supported by the price rise. 

Source: CTA Fund website, Editor: Lujiazui Commodities Forum