Copper Price Enters "Super Cycle" After New High? Polarization Of Secondary Market

The rebound in copper prices reached its peak on February 22.

On the same day, the 12 Shanghai copper futures contracts listed in China were all up and down, even the far month contracts delivered in February 2022 were no exception. As the leading LME copper futures, in the trading is not active in Asia, also appeared nearly 3% rise.

Overseas investment banks, represented by Goldman Sachs, raised the copper price target to US $10000 / T, and discussions on the coming of the "super cycle" of commodities in the domestic market poured in.

Different from other non-ferrous metals, copper has both commodity and financial attributes. It can even be said that every super cycle of copper price has its financial attribute.

This time is no exception. In the view of Jing Chuan, chief economist of CUHK futures, who has been tracking the nonferrous metals industry for a long time, "copper prices are in a weak equilibrium state. Fundamentals support the rise of copper prices, but they do not support rapid pull ups. It is the financial attribute that drives the short-term copper price to rise, that is, the capital inflow triggered by global excess liquidity and the unprecedented monetary over issuance of the Federal Reserve hit the US dollar. "

In his view, the "super cycle" of commodities needs to last at least 10 to 20 years. Even with a discount, it will last at least three to five years. However, assuming that the future epidemic situation stabilizes and drives economic development, the Federal Reserve is bound to return liquidity out of its responsibility for the US dollar. At that time, when the driving force from the financial attribute weakens, how can we talk about "super cycle"?

Why copper?

In the field of commodities, the financial attribute of gold is stronger. Whenever the world economy or monetary policy changes, its price sensitivity is the strongest.

However, in terms of the recent performance of the commodity market, it is the copper belt that leads the rise.

Since February, LME copper has increased by nearly 17%, the largest one month increase since the outbreak of the new epidemic, and the main contract of Shanghai copper rebounded by 17.06% in the same period. On the other hand, the gold price has fallen for two consecutive months and is currently on the line of 1780 US dollars / oz.

Why is the recent price performance of copper, which is less sensitive to finance, more prominent in the near future? This is related to the "cost performance" of a single commodity.

"In the past years, gold prices really took the lead in response, and gold was the first choice in terms of financial attributes, followed by basic metals. This year's situation is different, mainly due to the high price ratio of gold and copper. After the sharp rise of gold price last year, the capital side is also looking for value depression, so copper stands out. " Jingchuan said.

As far as the copper industry is concerned, the cyclical supply shortage is reflected in the weakening of output in 2020-2021. In terms of demand, the demand recovery of the power industry and the demand of overseas differentiated recovery for copper consumption will exceed the increase of supply, resulting in a weak balance between supply and demand this year, or even a short supply.

This has become the primary target of attracting funds for asset allocation for copper prices in the bull market stage of commodities.

While the price of base metals rose sharply, market sentiment also fell into a state of extreme optimism. Recently, Goldman Sachs and Citigroup have published research reports to see copper prices rise and raise their target price to US $10000 / T.

Nicholas Snowdon, an analyst at Goldman Sachs, believes that it will be sooner or later that copper prices will reach a new high. "After the end of the Chinese Spring Festival holiday, copper demand will burst, while at the same time, copper inventory will be limited, so there will be a copper supply deficit. The very low starting point of inventory at the beginning of this year further exacerbated the anti seasonal inventory reduction so far in the first quarter, which only occurred once in modern history (2004)

In addition, the agency further raised its target price of copper from US $10000 per ton to US $10500 per ton over the next 12 months.

However, Jingchuan believes that since the main driving force of the current round of copper price rise is liquidity flooding, the key to the continuation of the market also depends on the development of global liquidity. "The end mark will also be the Fed's QE withdrawal under the environment of maintaining low interest rates, and a large-scale market downturn is inevitable."

The opening of the "super cycle" of commodities mentioned by some institutions also applies to the above logic.

"The last round of market that can be called super cycle was in 2003. As the biggest industrial revolution broke out in China, external forces could not change it." Jingchuan said.

At that time, copper prices rose from $1600 per ton to 10190 yuan per ton in 2011.

At present, it faces the uncertainty of the Federal Reserve's monetary policy. "Judging whether commodities including copper are in a super bull market depends on whether liquidity is in a super bull market. Today, the maturity of large-scale US Treasury bonds has passed. Once the epidemic situation improves and the economy recovers, the interest rate of the Federal Reserve may not be adjusted, but the recovery of liquidity is inevitable. " Jingchuan said.

The craziness of Zijin Mining

Although the current round of copper price rise is the guidance of its financial attribute, as one of the most important raw materials in the upstream, the price fluctuation will naturally transmit to the downstream step by step.

The most intuitive change is the secondary market.

Originally, Midea Group (000333. SZ) was on an upward trend, and just reached a record high before the Spring Festival. However, in the recent acceleration of copper and other basic metals, the company's share price fell continuously, falling 8.23% on February 18 and 7.7% on February 22.

In contrast, the recent trend of home appliance stocks is not ideal. From the beginning of February to now, seven of the top 10 home appliance enterprises in terms of market value have fallen over the same period.

The market has a view that the recent rebound in the prices of copper, aluminum, zinc and other basic metals has brought cost suppression effect to the rise of household appliances.

The real reason is difficult to investigate. However, from the perspective of historical experience, household appliance enterprises can transfer the rising cost of raw materials to the terminal through price adjustment.

From 2009 to 2011, LME copper rose from 3300 USD / T to 7573 USD / T. Since the data are available, the gross profit rate of Midea Group has increased from 2010 to 2011, and only the gross profit rate of small household appliances has declined by less than 1%.

In contrast, during the above copper price rise period, Gree (000651. SZ) profit margin decreased significantly. In 2009, the gross profit rate of the company's air conditioning products was 24.86%, dropped to 22.54% in 2010, and further fell to 18.49% in 2011.

On the other hand, the procyclical industry represented by copper industry has become one of the biggest hot spots in the secondary market recently.

From the beginning of February to 22, all the 15 stocks included in Shenwan copper industry rose, with an average increase of 20.3%. Jiangxi copper and Yunnan copper, the leading domestic enterprises, increased by 57.27% and 35.1% respectively.

However, it should be pointed out that domestic copper smelting enterprises mainly earn smelting costs, that is, TC / RC fees - the fees paid by the miner or trader to the smelter to process copper concentrate into refined copper. The former is the roughing cost, and the latter is the refining cost.

In other words, if the copper price rises, not all copper smelting enterprises' profitability will rise.

If copper prices continue to rise, ordinary smelting enterprises will face the risk of the above-mentioned processing costs. "Not only domestic enterprises, but also global copper smelting enterprises will face this problem." Jingchuan said.

Relatively speaking, copper smelting enterprises with high proportion of self owned mines and less processing of incoming materials will benefit more.

The secondary market also gives the answer. Jiangxi copper and Zijin Mining (601899. SH), which ranked the top in terms of growth, are domestic copper enterprises with relatively high proportion of independent mines. The latter has also increased by more than 50% since February.

The valuation ideas from the seller are mainly reflected in the copper mine level.

Based on the assumption of copper price of 9500 US dollars / ton and gold price of 2000 US dollars / ounce, CITIC Securities estimated the value of Zijin mining resources to be 5.6 trillion yuan, and the corresponding market value range of a shares was 412.7-557.6 billion yuan.

As of February 22, the total market value of Zijin Mining has risen to 358.4 billion yuan.