20140117-美银美林-China_New_Year_bullish_copper_22页_1mb

China New Year: Bullish Copper Summary

Core Content

This document provides an analysis of the copper market in early 2014, with a focus on China's role in influencing prices and supply-demand dynamics. The report highlights that despite a weak start to the year, the market is expected to show a significant uptick following the Chinese New Year, driven by a combination of factors including inventory levels, monetary policy, and underlying demand.

Main Points

• Copper Prices and Seasonality:
  Copper prices typically weaken in the period leading up to the Chinese New Year but tend to strengthen in the weeks following it. This is attributed to the stocking behavior of Chinese market participants, who often re-stock in the first quarter, which influences LME prices later in the quarter.

• China's Copper Stocks at Multi-Year Lows:
  China's copper stocks have fallen to a multi-year low due to a combination of factors, including reduced destocking and lower production. This tight supply is expected to support copper imports and potentially lead to a price increase post New Year.

• Underlying Demand Growth:
  Despite a structural slowdown in China's economy, underlying copper consumption remains steady. The power and industrial sectors are key contributors to this demand, with the power sector accounting for 48% of China's copper consumption.

• Copper Imports and Production:
  China's copper imports are expected to remain within historical ranges due to rising domestic production. The country's refined copper production is projected to grow significantly in 2014, which could affect the balance of supply and demand.

• Monetary Policy Impact:
  Tight monetary conditions in China have historically influenced copper prices, as market participants have used deferred letters of credit and collateralized metal for loans. This trend may continue, with the potential for a correction in prices before a rally.

• State Reserves Bureau (SRB) Activity:
  There is an expectation that the SRB may purchase 300kt of copper in 2014, which could provide support to the market. However, this purchase is likely to occur after a correction, rather than during a rally.

• Supply Constraints and Market Outlook:
  The report suggests that supply constraints and the continued tightening of monetary policy may keep copper prices within a range, with a potential spike towards $7,750/t in early 2014.

Key Information

• Copper Imports and Demand:
  China's copper imports are expected to remain stable, with a forecasted demand expansion of 7% YoY in 2014. The report also notes that the country's net refined copper imports have remained within historical ranges.

• Inventory Trends:
  China's copper inventories have been at multi-year lows, indicating a potential for increased demand post Chinese New Year. The LME inventories have also been declining, reflecting tight physical market conditions.

• Market Seasonality:
  Copper prices have historically shown a pattern of underperformance in the month prior to Chinese New Year, followed by a rally in the four weeks after. This trend is expected to continue in 2014.

• Production and Consumption:
  China's refined copper production is projected to increase significantly in 2014, while consumption is expected to grow at a steady pace. The report acknowledges that production data may be slightly over-reported.

• Global Market Outlook:
  The global copper market is expected to be balanced in 2014, with China's demand playing a crucial role. The report does not take a bearish view on copper, given the backdrop of accelerating global growth.

Summary of Copper Forecast

• 1Q14: Copper is expected to trade above $7,500/t, with a potential spike towards $7,750/t.
• 2Q14: Prices are expected to stabilize, with the market increasingly better supplied.
• 2014E: The overall forecast is for a balanced market, with copper prices not breaking out of multi-year ranges on a sustained basis.

Conclusion

The report concludes that the Chinese New Year is an inflection point for copper prices, with the potential for a meaningful rally in the coming weeks. While the market has had a mixed start to 2014, the combination of tight inventory levels, steady underlying demand, and potential SRB purchases supports a bullish outlook for copper. However, the report also acknowledges the risk of tighter monetary policy and continued oversupply, which could limit the extent of the price increase.