Following a mid-May rally, copper prices have since retreated, with the early June peak failing to surpass the mid-May high and recent lows trending lower. Macroeconomic systemic pressures have been the dominant force, with a strengthening US dollar and weaker gold and silver prices weighing on copper. However, copper's inherent commodity characteristics have limited the extent of its decline.
Vigilance on Macro Liquidity Risks
Geopolitical tensions saw a dramatic reversal on June 11th, with the US administration calling off planned strikes on Iran and stating that a US-Iran agreement was in its final drafting stages, potentially to be signed by the weekend. However, the potential for volatility remains. International oil prices have retreated from earlier highs, but data reflecting the resulting inflationary pressures is only now emerging. US CPI for May rose 4.2% year-on-year, with core CPI up 2.9% and PPI surging 6.5%. Concurrently, labor market data remains robust, with May non-farm payrolls adding 172,000 jobs, significantly exceeding expectations, and the unemployment rate holding steady at 4.3%. March and April payroll figures were revised upward by 93,000. The combination of inflation and strong employment has increased the probability of a Federal Reserve rate hike this year, strengthening the US dollar and Treasury yields and exacerbating macro liquidity risks. The European Central Bank has already taken action, raising rates for the first time since September 2023. In the short term, focus will be on whether a US-Iran agreement materializes and the status of navigation through the Strait of Hormuz. A de-escalation could alleviate inflation and rate hike pressures. Additionally, the Federal Reserve's new chair will hold his first policy meeting this month, with market attention on his policy stance and the updated "dot plot."
Sustained Tightness in Copper Mine Supply
Due to years of insufficient capital expenditure, declining ore grades, and smelting capacity expansion, a long-term structural tightness in copper mine supply has become a market consensus. The tighter the mine supply, the lower the treatment and refining charges (TC/RCs). The annual benchmark TC for 2026 copper concentrate has been set at $0 per tonne. The spot import TC index has been negative since last year and accelerated its decline after March this year, falling to -$113.83 per dry metric tonne last week. Despite the negative TCs, robust prices for the by-product sulfuric acid provide a crucial profit supplement for smelters, sustaining their strong demand for raw materials. However, TCs cannot decline indefinitely. If by-product revenues fail to cover the TC deficit, smelters will eventually slow procurement and production.
According to the International Copper Study Group (ICSG), global mine production for the first three months of the year was 5.59 million tonnes, largely flat year-on-year. Output from major producer Chile has maintained a year-on-year decline in 2024, with April production down 13.8% to 399,900 tonnes. Chile's copper concentrate exports in May totaled 1.213 million tonnes, with exports to China at 535,500 tonnes, showing a notable decline from April. Peru's copper output for the first three months rose slightly by 3.3% year-on-year to 688,200 tonnes. China's copper concentrate imports in May were 2.3607 million tonnes, stabilizing after a sharp drop in April, showing a slight year-on-year decrease of 1.4%. Cumulative imports for January-May reached 12.275 million tonnes, down 1% year-on-year. As of last week, copper concentrate inventories at SMM-monitored major Chinese ports stood at 698,300 tonnes, edging up from recent lows.
No Significant Production Cuts by Domestic Smelters for Now
From a global perspective, ICSG data shows global refined copper production for the first three months was 7.29 million tonnes, an increase of 312,000 tonnes or 4.5% year-on-year, resulting in a supply surplus of 396,000 tonnes. Production in China and the Democratic Republic of Congo, which account for 60% of global output, grew by 9%, while output in other countries fell by 1.4%, with Chilean production declining by 11.7%.
Domestically, according to official statistics, China's cumulative refined copper output for January-April was 5.037 million tonnes, up 7.4% year-on-year. SMM data shows domestic electrolytic copper output in May was 1.1694 million tonnes, down slightly by 9,500 tonnes month-on-month but up 2.7% year-on-year. Strong sulfuric acid prices in May continued to provide a significant profit source for smelters. Coupled with relatively ample anode copper supply and steady ramp-up at newly commissioned smelters, overall production declines were limited despite routine maintenance at some facilities. Currently, profits from by-products and comprehensive recycling allow smelting operations to maintain marginal profitability, and there are no large-scale production cuts. However, the pace of decline in copper concentrate TCs warrants close monitoring.
Tightening Copper Resources Outside the US
The pace of refined copper destocking in China slowed noticeably in May, with SMM-monitored social inventories of electrolytic copper hovering around 245,000 tonnes. Inventories turned lower again after June, dropping to 217,800 tonnes as of this Thursday. Overall inventory levels are moderate, higher than the same period last year but below the elevated levels seen two years ago. The latest total copper inventory on the Shanghai Futures Exchange is 169,500 tonnes, with warrant stocks at 97,400 tonnes, slightly on the low side. Spot premiums have edged up recently, with the SMM #1 electrolytic copper spot premium around 30 yuan and the Yangtze River Nonferrous #1 copper spot premium recovering to around 140 yuan. After May, LME copper registered warrant stocks fell rapidly, with the latest total inventory around 367,000 tonnes and registered warrants down to 227,000 tonnes. The cash-to-3-months spread narrowed to a contango of around $35 per tonne. As LME registered warrants declined, COMEX copper inventories have been climbing. The market is again pricing in the potential for US import tariffs on copper, with the COMEX-LME price spread widening to open arbitrage windows, facilitating a transfer of copper resources to the US. COMEX copper inventories have risen to nearly 650,000 tonnes, with registered warrants at 432,000 tonnes, indicating tightening copper availability in regions outside the United States.
Demand Support Appears Lackluster
Since late April, as previously placed orders were largely fulfilled, operating rates at copper fabricators gradually declined, a trend persisting through late May. In the first week of June, operating rates at SMM-monitored refined copper rod and wire & cable enterprises saw a slight uptick as they worked through existing order backlogs. However, new order intake remains weak, with orders from the two major state grid companies softening. Demand resilience is notable only in submarine and communication cables, while demand in other sectors remains subdued. On the end-user front, SMM estimates show a significant increase in both the volume of State Grid copper tenders and deliveries in April. Air conditioner output in April fell 4.7% year-on-year, while export volumes were largely flat. According to industry data, planned air conditioner production for June is 15.23 million units, down 18.9% from actual production in the same period last year. Automobile production and sales in May remained weak year-on-year, falling 1.2% and 2.1% respectively. However, new energy vehicle production and sales showed marked improvement, rising 22.4% and 14.4% respectively.
In summary, against the backdrop of Fed rate hike expectations, downside risks for gold, silver, and copper have increased. The short-term focus remains on the potential US-Iran agreement and the Fed chair's commentary. On the supply-demand front, tight mine supply is unlikely to ease, with copper concentrate TCs at extremely low levels. Smelters have not significantly cut production due to profit supplements from sulfuric acid and comprehensive recycling. Demand is currently stable, providing some support against sharp price declines. Domestic refined copper inventories are declining. While LME registered warrant stocks are falling, COMEX inventories continue to rise to elevated levels, tightening copper availability outside the US. Macroeconomic pressures and supply-side support are intertwined, suggesting both the upside and downside potential for copper prices may be limited. This analysis is for reference only.
Comments