● The asset price adjustment that has swept the financial market since May is caused by the market's concern about the central bank's tightening monetary policy and restraining the economy. Its essence is to reorganize the assets of the market in order to avoid risks.
Allocation behavior does not mean that there is a problem with the global macro-economy.
● The necessary condition for the peak of copper price is a substantial improvement in supply and demand. Judging from the current situation, it is difficult for the supply in the second half of this year to improve beyond expectations, and the supply of copper concentrate may continue to deteriorate. As the current interest rate is still at a low level and the central bank is still tightening monetary policy steadily and orderly, the market may be a little too worried about the excessive tightening of the central bank. It is more likely that the global economy will continue to grow rapidly in the second half of the year, and the demand for copper will increase greatly this year.
● As the supply and demand situation has not changed substantially, it is expected that copper prices will remain at a high level in the second half of this year, and there is still the possibility of a new high. If the central banks of major countries suddenly increase their tightening efforts to curb the risk of accelerating inflation, economic growth may stagnate. If the excessive tightening of monetary policy causes potential risks to the economy, it may cause a sudden decline in the economy. This is the biggest risk of copper price.
If the trend of copper prices in 2005 has surprised most investors, then the market changes in the first half of 2006 are even more jaw-dropping. In 2005, the fluctuation range of LME copper in three months was $3,000-$4,500, and the increase from low point to high point was a little over 50%. But you know, this is the first time in history that copper prices have continuously risen above $3,000. In 2006, after the market adjustment in February, the copper price rose from $4,650 to $8,800 from the end of March to the beginning of May, and rose by more than $4,000 in less than two months.
Since the copper price can rise by 83% in less than two months, it is normal to adjust back to $2,000-3,000. Just because the copper price has dropped by more than $2,000 from the high point, it cannot be considered that the top has been formed. To judge whether the copper price has reached the peak, under what conditions can the copper price reach the peak, and even the future trend, we must also analyze the basis of the copper price increase, the reasons for the adjustment, and whether the factors that caused the copper price adjustment really eroded the basis of the increase.
First, the background and reasons for the rise in copper prices
The main reason for this round of copper price increase is the demand growth brought by economic growth and economic structure change, which is a demand-driven increase.
Figure 1 Global Economic Growth Figure 2 Global Copper Demand
From 2002 to 2005, the global economic growth rate rose steadily, reaching 5.3% and 4.8% in 2004 and 2005 respectively, while the average growth rate in the 1990s was less than 3.3% (see figure 1). Economic growth pushes up demand. In 200 1 year, the global demand for copper was14513,000 tons, reaching16.93 million tons in 2005, with an increase of 16.7%, with an average annual increase of 3.9% (see Figure 2).
Figure 3 Growth of copper demand in China and the world
Changes in the global economic structure have further promoted the rise in demand. Specifically, the rise of developing countries, especially China, has greatly promoted the consumption of copper. From 200/kloc-0 to 2005, the global copper consumption increased by 24010.7 million tons, while China reached10.525 million tons, accounting for 63% of the global increase (see Figure 3). The economic take-off of developing countries not only promotes the rise of copper prices from the perspective of demand growth, but also makes suppliers unprepared because of the sudden and explosive demand growth, which increases the rising speed and volatility of copper prices.
Figure 4 Global refined copper inventory
Demand has increased rapidly, but supply has not kept up. In the 1990s, due to the low price of resources, the investment in production and exploration was seriously insufficient. Therefore, after 2002, it is difficult for ore mining and smelting production to keep up with the pace of demand growth, which is manifested in the decrease of rich ore, the decrease of ore grade and the shortage of large machinery and skilled workers.
In addition, full-load production and high copper prices have also produced two negative factors: 1. Full-load production means an increase in accidents, such as workers' casualties, mechanical failure, unsustainable logistics support such as water and fuel; 2. The rise of copper price has inspired all stakeholders to change the interest distribution pattern, and various labor disputes are the most direct consequences, which is also part of the reason why national economism has gradually become a trend in recent years.
The result that supply can't keep up with demand is that inventory drops to a very low level. According to the data of international copper research organization, the global refined copper inventory in 2005 was only enough to meet the demand of 2.68 weeks, and this year's inventory consumption ratio will not exceed 3 weeks. There is a negative correlation between inventory and price, and the price rises slowly with the decrease of inventory, but when the inventory falls below a certain critical point (such as three weeks' consumption), the price will rise linearly (see Figure 5), because extremely low inventory means that the market is unable to cope with sudden demand growth or supply changes, and the price must include this risk premium, and the price must also rise to the point where demand continues to grow at a high speed, so as to alleviate the inventory pressure. This happened in 2005 and 2006.
In addition to rapid demand growth, weak production promotion and low inventory, rising production costs and currency appreciation in producing countries have also pushed up copper prices.
In addition, the global commodity boom has also greatly changed the market participant structure of basic metals. In the past, mutual funds, pension funds, hedge funds and index funds, which rarely set foot in the commodity futures market, entered the base metal market one after another, which aggravated the price increase of base metals. The full entry of these funds into the basic metal market reflects that the fundamentals of basic metals, especially copper, zinc and nickel, are indeed conducive to speculation, on the other hand, it also reflects the global excess liquidity. It is this excess liquidity that has led to the unusually hot emerging markets and commodity markets in recent years. In its annual report on global development finance in May, the World Bank said that in 2005, the net private capital flowing to developing countries reached a record $4,965,438 billion, while in 2003 it was only $85 billion. In that year, the amount of bond financing in developing countries also reached a new high, reaching 1, 3 1 billion US dollars. The driving factors of a large amount of funds flowing into emerging markets are abundant global liquidity (the most representative is the ultra-loose monetary policy adopted by the Federal Reserve after the bursting of the Internet bubble), the steady improvement of credit quality in developing countries, the reduction of yields in developed countries and the expansion of investors' interest in emerging market assets.
And all kinds of funds flowing into the commodity market are also huge, which leads to the explosive rise in the prices of commodities with very tight fundamentals such as copper.
Second, how do you view this price adjustment?
This copper price adjustment occurred not only in the basic metal market, but also in many asset classes in the financial market. The reason for the adjustment is that the market expects that the central banks of major countries in the world, especially the Federal Reserve, will continue to tighten monetary policy. The essence of adjustment is that investors reallocate assets in order to avoid risks in the expectation of continuous tightening of monetary policy.
Figure 6 US residual liquidity and federal funds rate
After the bursting of the Internet bubble in 2000, especially after the "9. 1 1" incident, major central banks around the world implemented extremely loose monetary policies, resulting in abundant market funds (see Figure 6). Excess liquidity promotes economic and financial markets in at least four aspects: 1. Excess liquidity means low interest rates, stimulating investment growth and real estate prices; 2. Rising real estate prices lead to the expansion of residents' wealth and promote consumption growth; 3. Excess capital means increasing demand for risky assets (emerging market stocks, junk bonds, commodities and other financial derivatives), thus pushing up asset prices. 4. The rise in commodity prices indicates that the income of commodity exporting countries has increased, thus promoting consumption and investment in these countries.
However, with the growing threat of inflation, major central banks have begun to tighten monetary policy. The Federal Reserve began to raise interest rates as early as June 2004, and has raised interest rates continuously 17 times as of June this year. The European Central Bank has raised interest rates three times since last year. The Bank of Japan also abandoned the "extremely loose monetary policy" implemented since 200 1 this year, claiming to reduce the residual liquidity in the market.
Since excess liquidity is an important reason for economic growth and asset price rise since 2002, with the Fed gradually raising interest rates to the "neutral" monetary policy range and global monetary tightening, the market will inevitably expect that monetary policy will curb economic growth and commodity demand, thus some investors will withdraw from risky assets, and the global financial market will undergo substantial adjustment.
From May 10, the spread between American BBB corporate bonds and ten-year treasury bonds began to rise, indicating that funds are being withdrawn from risky assets. In May 1 1, the spread between the Hong Kong Interbank Offered Rate (HIBOR) and the London Interbank Offered Rate (LIBOR) turned from falling to rising, indicating that funds were leaving emerging markets. Another sign that investors are pessimistic about the economic outlook is that the yield curve of U.S. Treasury bonds has started to level off again, and the yield curve is upside down again.
However, judging from the relationship between supply and demand of commodities such as copper, there is no obvious sign of deterioration, so the price of copper has been greatly adjusted this time.
More influenced by the surrounding markets (emerging stock markets, precious metals markets) and investors' worries about the future economy, the price of risky assets fell due to the increase of investors' risk aversion. If the macroeconomic data after the Fed remains stable, there is still a great possibility of investor confidence reunion, and then there is a great possibility of capital flowing back to emerging stock markets and commodity markets.
3. Views on the trend of copper price in the second half of the year
Because the reasons for the rise of copper price are rising demand, weak supply growth, declining inventory and rising production costs, it is necessary to analyze the trend of copper price in the second half of the year and judge whether this adjustment means the formation of the top, depending on what changes have taken place in the supply and demand situation in the second half of the year and whether the factors that caused this adjustment have substantially changed the relationship between supply and demand.
From the supply side, the reasons for the weak growth of copper production, such as the decrease of ore grade, rich ore, accidents and strikes, will continue in the second half of the year, and it is unrealistic to expect to suppress copper prices by greatly increasing supply.
The global refined copper output predicted by major institutions this year is about17.8 million tons. Although the growth rate is higher than 6%, the balance between supply and demand has not changed substantially. CRU predicts a supply balance of 6.5438+0.2 million tons this year, Brook Hunt predicts a supply shortage of 20,000 tons, and the International Copper Research Organization thinks that the supply balance this year is 250,000 tons (see table 1). Whether supply exceeds demand or supply exceeds demand, the balance or difference between supply and demand predicted by various institutions is relatively small. Even the balance of supply and demand estimated by the International Copper Research Organization only accounts for 1.4% of its predicted output.
We believe that whether it is 6.5438+0.2 million tons, 20,000 tons or even 250,000 tons, compared with the output and demand above 6.5438+0.7 million tons, it is not a substantial oversupply. At present, strikes and accidents continue, and there is great uncertainty between supply and demand in the second half of the year. If the supply and demand situation changes casually, the balance of supply and demand can easily change direction. Even the difference in results caused by different statistical caliber and methods of different institutions can smooth out this tiny balance between supply and demand.
Table 1 Forecast data of refined copper supply and demand of different institutions (thousand tons)
What's more, this year's supply problem mainly occurred in copper concentrate. Brook Hunt predicts that the output of refined copper and smelting will increase by 6.73% and 4.99% respectively this year, but the output of copper concentrate will increase by only 3.43%, and the growth rate of ore supply obviously cannot keep up with the growth of smelting and refining capacity. Although many analysts believe that the copper concentrate accumulated in previous years will meet the excess demand this year, it is a fact that the supply of concentrate is increasingly tight. According to Brook Hunt's data, TC/RC dropped to 75 (USD/ton) /7.5 (USD/pound) in April this year, and even lower in May, while the average price last year was 65,438+045 (USD/ton)/65,438+04.5 (USD/pound). According to Xinhua News Agency, recently, eight domestic copper smelting enterprises claimed that they would resolutely resist the seller's behavior of lowering processing fees, and called on the Ministry of Commerce not to issue certificates for spot imported copper concentrates with TC/RC lower than 100 USD (per ton)/10 cents (per pound). This news also reflects the tight supply of copper concentrate.
In fact, judging from recent events, the supply of copper concentrate will not improve in the second half of the year, and may even continue to deteriorate. For example, the strike of La Caridad copper mine in Mexico, which lasted for more than two months, has not stopped, and Cananea copper mine has joined in, and there is still the possibility of a national strike. The strike forced the Mexican group to announce the closure of La Caridad copper mine, and claimed that Cananea copper mine might also be closed. The trade union of Escondida copper mine in Chile, the world's largest copper mine, is negotiating with the management, and the leaders of the trade union claim that they will go on strike if necessary.
Since the supply situation has not improved, the only factor that may lead to the peak of copper price is the decrease in demand. In this adjustment, the reason why the market is worried about the central bank tightening monetary policy is because investors are worried that the central bank tightening policy will hit the economy and reduce the demand for copper.
The central bank's contraction policy can indeed cool the economy, but we believe that it is not appropriate to predict that copper prices have peaked just because the central bank continues to raise interest rates.
Figure 7 Federal funds rate and copper price
Central banks in major countries are still raising interest rates, indicating that the economy is still expanding. Judging from the current economic data, there is indeed the possibility of further economic expansion. As of April this year, the six-month change rate of OECD leading indicators has been rising continuously 12 months, and OECD leading indicators are generally ahead for six months. The continuous increase of the change rate of this indicator means that the global economy will still be in an expansion state at least until this year 10. Since the economy is still expanding, how can demand fall? From the historical experience, the trend of copper price is positively related to the target interest rate of the central bank.
We believe that the contraction of liquidity by major central banks does have a great inhibitory effect on economic growth and copper price rise, but the real danger should occur after central banks stop raising interest rates. From past experience, the top of copper price is generally formed after the target interest rate of the central bank reaches the top. In other words, if the central bank finds that a slow and orderly rate hike cannot curb the inflation risk, it will inevitably increase the interest rate hike regardless of economic growth and stop the price increase and economic expansion by slamming on the brakes. When the economic expansion stops, copper prices will lose the basis for rising.
After several years of rapid economic growth, there may be some fatal weaknesses, and the contraction of the central bank is likely to expose these weaknesses, and may even lead to a relatively big crisis, which is another risk for the central bank to increase its contraction. If risks like 1997 Southeast Asian financial crisis are really triggered, then copper prices will definitely reach the peak.
Although there is a risk of excessive tightening by the central bank, it is only a possibility in the future. At least there is not much evidence that there are signs of economic recession and depression. As far as the macro-control of the US real estate market and China, which the metal market is most concerned about, there is no major crisis at present. The real estate market in the United States is indeed declining, but it is steadily declining. In absolute terms, housing starts and sales are at a high level. After all, the Fed is still raising interest rates steadily, but it has not suddenly tightened. Moreover, the current interest rate is not high by historical standards, and the possibility of an avalanche in the real estate market is not great. China's macro-control has a great influence on short-term economic growth, but we should see that China is in the long-term trend of industrialization and urbanization, and its demand for metals is rigid to a great extent. This year is the first year of China's 11th Five-Year Plan, and this year and next will be the first year for local leaders to complete the transition and the new leadership to be in power. Even if the investment scale is reduced, it is expected that the compression time will not be long. In addition, a large part of this year's investment growth comes from infrastructure investment such as electricity and investment in the central and western regions. No matter from the spirit of the central policy or from the long-term development trend, the reduction of investment will not be great.
To sum up, it is unlikely that copper demand will shrink sharply in the second half of this year. According to Brook Hunt's data, the global consumption growth rate of refined copper reached 6.42% in the first quarter of this year, and it is expected to decline in the third and fourth quarters, but the annual growth rate will still reach 5.72%, with consumption growth rates in North America and China reaching 2.82% and 8.99% respectively.
Therefore, judging from the supply and demand of the copper market, it is unlikely that the supply and demand situation will be greatly improved in the second half of this year, and the tight supply and demand situation will continue. If the supply and demand situation has not changed, copper prices will remain at a high level, and after the market panic subsides, there is still the possibility of challenging the previous high or even hitting a new high.