Futures Daily reported on November 16 that LME copper fell sharply on November 14, touching the 60-day moving average. We believe that although copper price retreated in the short term affected by the weak data released by China, the overall upward trend of China's economy remains unchanged, and economies of other major major economies still perform well, which will boost copper demand from terminal industries. It is estimated that the downside room for copper price is limited.
Global Economic Growth Forecast Upgraded
Recently, some economic data released by China have been underwhelming. China's real estate investment growth has turned downward, with the national real estate investment growth slowing to 7.8% in January-October; the sales area of commercial housing also continues to fall, with the growth rate down more than 2 percentage points compared with that in January-September. Meanwhile, the growth of China's urban fixed asset investment and private investment both declined in the first 10 months. Data shows that national fixed asset investment grew by 7.3% year-on-year in January-October, 0.2 percentage points lower than the growth rate in January-September; private fixed asset investment rose by 5.8% year-on-year in January-October, 0.2 percentage points down from that in January-September. But the market believes that China's overall economic operation remains stable, the quality of supply-side reform keeps improving, and China's 2017 GDP growth is still expected to reach 6.8%–7%.
Other major economies have posted sound economic performance. Both the U.S. PPI and core PPI hit new highs since February 2012 year-on-year in October, indicating that U.S. inflation pressure is starting to emerge. A rate hike by the Federal Reserve in December is basically certain, leading to a sharp retreat of the U.S. dollar index. Strong domestic demand has driven economic recovery in Europe, and the Eurozone's year-on-year GDP growth in the third quarter met the expectation of 2.5%. Multiple ASEAN countries have maintained their year-on-year GDP growth at around 3% for a long time, and the EU has raised its 2017 economic growth forecast for the Eurozone from 1.7% to 2.2%. The upgrade of global economic growth forecast suggests there are no major risky events in the market and indicates that the price trend of base metals is upward.
Fundamentals Remain Sound
From the raw material side, we believe copper production grows slowly and copper concentrate supply is tight. First, copper ore grade has declined: since 1990, global average copper ore grade has dropped from 1.6% to around 1%. Large copper mines in Chile are seriously aging, with their grade declining relatively obviously. Chile's average copper ore grade is expected to be 0.71% in 2017, lower than the global average. Second, the growth of capital expenditure for copper mines has slowed down: capital expenditure on copper mines in 2016 fell by about 60% compared with 2012. Copper price rose by more than 50% from the fourth quarter of 2016 to the end of the third quarter of 2017, yet this did not stimulate miners to sharply increase capital expenditure. Finally, the negotiation on 2018 long-term copper concentrate contracts between domestic smelters and overseas mines is about to start. Judging from the low tender price offered by traders, we believe the maximum TC (Treatment Charge) for 2018 long-term copper concentrate contracts will be 85 USD per ton.
From the perspective of China's copper terminal industries, copper's consumption outlook remains optimistic. We believe infrastructure investment growth will recover, and the PPP market is registering rapid growth. As of the end of October, the total value of awarded PPP projects across China has reached 8.05 trillion yuan, and newly concluded projects in 2017 reached 3.58 trillion yuan, among which municipal engineering, transportation, ecological construction and environmental protection industries contribute a large share.
Real estate market supply will improve, and the proportion of affordable housing, shared-ownership housing, rental housing and other housing will increase. From the perspective of the power industry, the copper volume involved in State Grid's bidding in the fourth quarter is significantly better than the same period last year. It is expected that with the recovery of the construction industry, the consumption of wires and cables will keep increasing. In addition, the steady growth of the consumer goods industry also drives up copper consumption.
Conclusion
In conclusion, we believe that the overall global macroeconomy is improving, indicating that there will be no major risks in the market, and base metal prices will maintain an upward trend. From the perspective of fundamentals, the recovery of copper consumption is expected to outpace the supply growth of copper mines, which is conducive to the rebound of copper prices. At present, although copper prices have seen a short-term correction under the impact of bearish factors, we believe the downside room will not be large. It is recommended that investors wait for prices to stabilize and focus on buying on dips.
