Fundamental Analysis Report on 24 February 2023
From a fundamental perspective, China’s refined copper production continues to climb, and short-term maintenance factors are likely to affect production in March and April, some of the maintenance companies include includes Daye, Jiangtong Futu, Tongling jin Guan and Baiyin non-ferrous metal.
This year, new production capacities are climbing. Maintenance is not likely to change the trend of production expansion. Instead, the changing rhythm of production will likely affect the performance of arbitrage trading.
In terms of imports, the premium on European refined copper is significantly higher than that of China. In China, the traditional mode of trade is affected by Mai ke’s bankruptcy.
Maike Group
Maike Group is a company that deals in commodity trading and its business are international with offices in multiple countries including UK, Singapore, and China.
Despite its reputation as one of the largest private enterprises in Shanxi, the company was sued. The amount of the payment that was defaulted was 1 billion yuan. In response to the situation, the company has issued a notice stating that it will reasonably design a debt settlement plan and ensure that creditors are compensated, this will restore the company’s operations.
Through this incident, traders may take the initiative to self-check or avoid related risks, and in the short term, import growth will continue to be limited. Likewise, China’s demand is relatively slow in the short term, and the widening import loss has maintained a restraining effect on imports.
Overall, the growth of refined copper imports from March to April is expected to be weak. From the data, bonded zone inventories continue to recover, and import premiums are low.
Supply
From the supply perspective, Orient Futures analyst have estimated that refined copper supply in China during the months of March and April will experience a rare period of low growth for the year. Currently, southwest China is experiencing a power shortage and potential supply disruptions continue to exist, this is likely to create conditions for a regional shortage which will be an important point for arbitrage, domestic and international hedging in the future.
Data Source: Mysteel and Orient Futures Derivatives Research Institute
Figure 1:Seasonal Changes in Inventory in Shanghai Free Trade Zone Chart.
Figure 2: Seasonal changes in LME inventory
Overseas, Chile’s refined copper production is recovering relatively slowly in the first quarter, and some smelters in Japan and South Korea in the Asia-Pacific region are experiencing a decline in sales due to maintenance issues, which are limiting growth in refined copper production in the first quarter. However, we expect the situation to gradually improve in the second quarter. In terms of exports, if import losses widen, domestic smelters will be more willing to export refined copper through processing manuals, and we expect the pressure on overseas refined copper supply growth to gradually increase in the second quarter.
Demand
In comparison to supply, there is a greater possibility of a structural differentiation in demand. China’s end demand will continue to gradually recover under the policy stimulus; however, overseas end demand is constrained by high interest rates, economic recession and there will be a greater likelihood of continued decline overall.
The main difference in market expectations lies in the degree of demand changes, and we believe that the extent of domestic demand recovery in the second quarter, as well as the pace of overseas demand decline will greatly affect the implementation of arbitrage strategies.
Looking at domestic industries, the support of infrastructure for demand may strengthen in the transitional period, and demand related to consumption is weakly recovering. The pace of improvement in demand related to new energy is expected to be faster, but there is a greater possibility of continued decline in demand related to exports. In terms of direct demand, downstream low inventory and weak orders remain.
Fundamental and Technical Analysis
On the week ending on the 3rd of March, inventory in the global warehouse decreased, SHFE inventory increased, and inventory accelerated in the bonded areas, while the accumulation of inventory slowed down.
The supply and demand of scrap copper have lessened. The overseas recovery pace of refined copper production is slow. From the perspective of demand, after the Lantern Festival, the resumption of production at the trade end and processing end is faster. But the rebound of copper price rebound may limit the downstream inventory replenishment. Overall, it is expected that the main SHFE contract may fall below 67500 yuan/ton.
Figure 2:Source: Shanghai Orient Futures: Data Overview of Copper
Summary and Strategy
In summary, March and April is likely to lie in a position of internal strength and external weakness. The country’s internal strength refers to two main fronts, domestic refined copper supply growth phase slowed while the pace of demand recovery accelerated. Similarly, external weaknesses also present a two-fold challenge. Overseas refined copper supply was gradually restored while the slowdown in demand could accelerate. In terms of comparison, analysts forecast that the changing elasticity of the internal strength will be stronger than its external weakness.
From a fundamental perspective, the internal strength and external weakness may be strengthened in March or April, and there is likely to be a strong recovery in domestic demand and supply potential. For other countries, the pace of slowing external demand is likely to accelerate.
From a transactional standpoint, March-April domestic trade and restocking of processing plants will be a major factor. Under absolute prices, if macro forecasts remain on track and are repeated, a reset of the absolute prices and the possibility of downstream factories fulfilling stock replenishment will be more likely.
Based on these requirements, arbitrage traders can make use of various types of arbitrage strategies including cross-market arbitrage by locking in below the price of 1.11 and a target price of 1.15. Or a calendar spread arbitrage by long Shanghai copper at 2304 and short Shanghai copper at 2306. The locking-in should be below the price of 0 and with a target price of 200 and above.
Nonetheless, arbitrage involves tracking price movements and traders will still have to be cautious about price discrepancies and conditions of the financial markets.
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