Zhao Xiaojun: With contradictions between supply and demand gradually increasing, copper market outlook still pessimistic
----Interview with Zhao Xiaojun, senior analyst for nonferrous metals at Hangzhou Research Institute, Zhongda Futures
Zhejiang Zhongda Futures Company (ZDFC), established in 1993 in Hangzhou, China, is a core member of Zhejiang Materials Industry Group Corporation, which is one of the World Top 500 companies, and is a subsidiary of Zhongda Yuantong Group, which is a listed company. Meanwhile, it is a member unit of the Top 4 futures exchanges and ...
Asian Metal: Lately, the US dollar has continued to strengthen, and crude oil prices hit a six-year-low. In the event, most base metal prices have decreased significantly. How do you see the US dollar and crude oil trends developing in the future?
Zhao: The US economy started to improve after several rounds of monetary stimulus and the cheap cost of capital promoted the rapid development of the shale gas industry. From the point of view of employment and inflation expectations, the US economic recovery started modestly. After the Federal Reserve Bureau quit QE, the US dollar index began to strengthen while crude oil’s position weakened, restricted by the superpower games and shale gas revolution. Then speculation over an increase in US interest rates and the continuing decline of crude oil prices finally brought greater financial risks to the eurozone and emerging economies in Q1 and the non-US currencies were sold off, while the dollar was driven up by risk aversion. I think, although there will be short-term technical pressure in the future, the US dollar will continue to strengthen given the prevailing rate increase expectations and risk aversion. In addition, crude oil prices will test price ranges last seen at the end of 2009 due to political factors.
Asian Metal: At the end of January, the ECB (European Central Bank) announced the eurozone’s asset purchase facility of over EUR 1 trillion to cope with deflationary pressure and promote economic recovery. Will Euro QE boost the eurozone economy?
Zhao: As the debt structure in the eurozone remains effectively unchanged, the trend towards deflation has seen no movement; the levels of corporate and household debt cannot be eased in the short term, even with the QE lowering real interest rates. Intermittent loosening has led to sharp fluctuations in the asset price, which may intensify the problems faced by eurozone members. Therefore, Euro QE may not boost the eurozone economy significantly.
Asian Metal: Copper prices on the SHFE and LME have continued to drop since the beginning of 2015, reaching their lowest point in five and a half years. Will copper prices dip even closer to the bottom in the short term? Currently, the market is seeing rumors once again that the SRB (State Reserve Bureau) will stockpile copper. Will this support and drive up copper prices?
Zhao: As monetary policy did not exceed the expected easing, the financial properties of copper as the core of the base metals gradually receded after the Qingdao incident, and since then the determining factor has been the fundamentals which refer to supply and demand. Any short-term good news around national storage of copper won’t change the fact that the economy is declining and demand weakening. Therefore, such actions could support the copper price for a short time but copper prices will continue to drop in the long term.
Asian Metal: The updated data from the National Bureau of Statistics of China showed that China’s copper output was 7.96 million tonnes in 2014. The output of copper at home and abroad continued to increase, and the operating rates of copper smelters were on the rise with China’s output steadily going up. Meanwhile, demand growth became slow. What are your thoughts on the relationship between supply and demand for copper in China?
Zhao: As PPI weakened on a MOM basis and a YOY basis and GDP stabilized at low levels during the acceptance of the New Normal in China’s economy, it also showed that the demand for copper continued to be sluggish. Contradiction between supply and demand will restrict copper prices, as well as China's economy, for quite a long time.
Asian Metal: The growth in investment by the State Grid Corporation of China is expected to be 9% in 2015, which would be significantly lower than that of 2014. However, China has begun to implement a 9% export rebate rate for copper bars, rods and profiles. Will demand for copper increase significantly in China in 2015?
Zhao: The new policy may boost demand for copper in China and contribute to easing the domestic market pressure from the oversupply of copper rod. Once the domestic price is lower than the international price, the traders will benefit from the new export rebate policy. However, as we know, the main demand for copper is from China, accounting for 50% of the global market, and the growth of exports in 2015 will be limited. Meanwhile, investment by the State Grid Corporation of China will be much lower than expected, so the total growth in demand for copper will be limited.
Asian Metal: How do you see the copper price trend developing in 2015?
Zhao: With crude oil prices continually declining, the domestic commodity price deflation trend is obvious and the overseas copper marginal cash cost has continued to drop, which has left more scope for copper prices to edge downward. Meanwhile, the relentless rise of the US dollar index is putting pressure on bulk commodities; contradictions between supply and demand caused by poor demand in China and high levels of output will restrict copper prices as well in the long term. However, given the changing economic situation and continued poor copper price, China will carry out the relevant solutions in terms of policy or currency factors, which will support copper prices to some extent but the downward trend will continue for certain. It is expected that the market will predominantly move down in 2015.
