As we enter the second quarter, global copper prices have remained in a narrow trading range, exhibiting remarkable stability and clearly reflecting the characteristics of a balanced market. The lack of a dominant driving force in the market amid the shifting dynamics of the global economic engine is the key factor underlying the current situation. The uneven economic performance among the three major economies—China, the U.S., and Europe—the expectation that the Federal Reserve and the Bank of England will raise interest rates in the second half of the year, the impact of ongoing negotiations in the U.S.-China trade dispute, the geopolitical turbulence in the Middle East triggered by the U.S. withdrawal from the Iran nuclear deal, and the continued rise in copper inventories at the LME and SHFE have all created a complex interplay of bullish and bearish forces, leaving copper prices trapped in a narrow trading range.

　　Beneath the solid ice, hidden currents are surging. Behind the relatively stable copper prices, certain forces are gradually gathering, and in the bull market, copper prices still retain the conditions for an upward breakout. The rotation of the global economic engine is gradually shifting dominance toward U.S. factors, whose driving potential will also come into play. The global economic recovery will continue to serve as the core driver boosting consumption. On the supply side, labor-management negotiations at Chile’s copper mines—and the resulting coordinated follow-up agreements across global copper mines—remain the biggest variables ahead. These developments could disrupt the current tight balance in the global copper market in the future. Therefore, we believe that the outlook for rising copper prices remains unchanged, and a rebound in the second half of the year remains a highly probable scenario.

　　I. Global copper supply and demand remain in a tight balance. According to the latest monthly report from the World Bureau of Metal Statistics, the global copper market experienced a supply deficit of 158,000 tons from January to March 2018, down from the full-year deficit of 235,000 tons in 2017. From January to March this year, global mine-produced copper output reached 4.9 million tons, an increase of 3.9% over the same period in 2017. Global refined copper production from January to March totaled 5.8 million tons, up 3.1% year-on-year, with significant growth in China and Chile—increases of 74,000 tons and 25,000 tons, respectively.

　　Although the global refined copper supply deficit in the first quarter of this year narrowed compared to the same period last year, we believe that in the second half of this year, several factors could disrupt the tight balance between global copper supply and demand. These include: uncertainties surrounding labor negotiations at Chile’s largest copper mine, which could lead to another round of strikes similar to those in the first half of 2017 and thus slow down the growth in global refined copper supply; China’s tightening import policies on scrap copper, which will prompt a shift from scrap to refined copper consumption but leave domestic new refined copper capacity unable to fully offset the shortfall; and the U.S. Trump administration’s infrastructure policy, set to be formally launched in the second half of the year, which is expected to boost U.S. copper consumption. As a result, the current tight balance between global copper supply and demand could face significant challenges this year.

　　II. On the supply side, labor negotiations at Chile’s copper mines still hold uncertainties. The 2017 labor strike led to a deficit in the copper market. Market expectations are that many major mining companies will reach agreements with their employers this year, thereby averting supply disruptions. This year, Chile has 32 labor contract negotiations to be finalized, accounting for roughly three-quarters of Chile’s copper production and one-fifth of global output. So far, numerous mining companies have already reached preliminary agreements with unions, sending a positive signal to those concerned about potential supply interruptions. Currently, all eyes are focused on another round of negotiations at Escondida—the world’s largest copper mine. The company and the union representing approximately 2,500 employees began talks in mid-April, with an initial plan to launch formal second-round negotiations in July. Union members at Escondida had previously started labor negotiations earlier. Following last year’s record-breaking 44-day strike at the mine, both the government and corporate leaders appear to have adopted a more moderate approach toward these negotiations. However, Diego Hernandez, head of the Chilean Mining Association, believes that Chile may avoid any major strikes this year, as both sides in the negotiations have lowered their wage expectations. Earlier, after Antofagasta signed what was arguably the most generous bonus agreement in Chilean mining history for its workers, the strike at the Los Pelambres mine was successfully averted.

　　Meanwhile, according to annual reports from major global mining companies, copper production contracted somewhat in 2017. The output of eleven mining companies in 2017 totaled 10.96 million tons, a year-on-year decrease of 3.8% compared to the 11.37 million tons produced in 2016. The factors behind this decline are diverse, among which the most noteworthy is the strike staged by union workers at Escondida, Chile—the world’s largest copper mine—in February last year. The strike, lasting one and a half months in protest against company layoffs, led to a significant drop in copper production by BHP and Rio Tinto. In addition to the adverse impact of frequent strikes triggered by intensifying conflicts between workers and companies, most companies’ annual reports also highlighted declining average grades of their copper mines, the gradual depletion of high-quality ore resources, and rising capital expenditures required to sustain production—resulting in higher production costs per pound of copper. Despite the decline in output, rising prices offset these negative factors: in 2017, the LME March futures contract price rose from US$5,542.5 per ton at the beginning of the year to US$7,251.5 per ton at year-end, an increase of as much as 30.8%. As a result, mining companies’ financial performance exceeded expectations, with revenues soaring year-on-year and profits reaching impressive levels. From the perspective of capital’s profit-seeking nature, further investment seems inevitable. We can see that major mining companies still tend to allocate more resources toward copper, suggesting that future supply will increase. Generally speaking, increased investment in copper mines reflects a relatively optimistic outlook on future prices. Meanwhile, the choice of copper ore grades is another critical factor influencing copper supply and deserves close attention.

　　III. China’s refined copper supply gap is set to widen slightly. As the world’s largest consumer of copper, China’s copper consumption in the first quarter of this year showed a weak performance, influenced by factors such as the continued downturn in the real estate market and a further slowdown in the growth rate of investment in the national power grid. Meanwhile, this year, China will add 1.28 million tons of new refined copper production capacity. On the other hand, the country’s increasingly stringent policies on imported scrap copper will cause part of the domestic scrap copper supply gap to shift toward refined copper. Moreover, it will take some time for the newly added capacity to be fully built and put into operation, and it will not operate at full capacity right away. Therefore, this year’s additional capacity will not be sufficient to fully offset the increase in consumption resulting from the shift from scrap copper to refined copper.

　　In mid-April, the Ministry of Ecology and Environment published on its website an announcement jointly issued by the Ministry of Ecology and Environment, the Ministry of Commerce, the National Development and Reform Commission, and the General Administration of Customs, titled “Announcement on Adjusting the Catalog of Imported Waste Management.” The announcement indicated that the import of 16 types of solid wastes—including waste ferrous metals, scrapped ships, crushed auto parts, smelting slag, and industrial-sourced waste plastics—will be prohibited, effective December 31, 2018. This means that the policy announced last July—that imports of seven categories of waste copper would be banned starting at the end of this year—has now officially taken effect! In 2017, China imported 3.558 million tons of waste copper (in physical terms), equivalent to 1.494 million tons of copper content after accounting for copper content. Of this total, about 700,000 tons were from the seven prohibited categories, representing a significant increase compared to 2016. Combined with the 11,822 tons of waste copper approved for enterprises in the twelfth batch of restricted-import solid-waste permits released this month by the Solid Waste Center of the Ministry of Ecology and Environment, the total quota allocated for the first twelve batches of restricted-import waste-copper permits in 2018 amounted to 482,400 tons. Last year, however, the total approved volume reached 3.01 million tons. This year’s approval volume has dropped by 83.9% compared to last year. Even taking into account factors such as some overseas plants under construction that are expected to undergo pre-disassembly (though progress has been slow, with only a few large-scale enterprises having completed or expressed interest in doing so, while most small- and medium-sized recycling and dismantling companies remain cautious or even considering exiting the industry), as well as increased imports of six categories of waste copper and higher domestic recovery rates of waste copper, it is highly likely that the ban on importing the seven prohibited categories of waste copper in 2019 will still reduce the supply of waste copper by approximately 300,000 to 400,000 tons.

　　Meanwhile, customs data also show that China's imports of scrap copper in March totaled 220,000 tons, with the cumulative figure for January-March declining by nearly 5.9% year-on-year.

　　Fourth, the incremental growth in global consumption will come from the United States. The infrastructure plan to be unveiled in the second half of the year will boost demand for copper. Although we’ve seen the U.S. Trump administration’s infrastructure plan repeatedly delayed—from shortly after taking office all the way to the present—we believe that, given Trump’s modus operandi and his track record of fulfilling promises made prior to taking office, although his infrastructure policy has yet to be rolled out, we can expect it to be announced sometime between the end of the third quarter and mid-fourth quarter of this year. This expectation is largely driven by his desire to build momentum for the midterm elections, secure votes, and safeguard his presidency.

　　According to data from the World Bureau of Metal Statistics, global copper consumption in 2017 totaled 23.733 million tons, with the United States accounting for 1.781 million tons, or 7.5% of the total—making it the second-largest consumer after China. Looking at the share of copper consumption across various U.S. industries, the construction sector accounted for 44%, ranking first.

　　Looking at current trends in the U.S. real estate market, on the one hand, although both new housing starts and building permits in the U.S. declined month-on-month in April, and the overall number of new housing starts and building permits currently remains at least 40% below their peak levels seen from 2005 to 2006, building permits for single-family homes in the U.S. rose by 0.9% in April to 859,000 units, while the number of single-family homes under construction increased by 1%, reaching the highest total since June 2008. This indicates that the core of the U.S. new housing market remains robust. On the other hand, examining recent changes in U.S. new-home sales and existing-home sales, both have shown a steady upward trend. Overall, the U.S. real estate market remains solid. It is expected that, as the Trump administration in the U.S. rolls out infrastructure policies from late Q3 to mid-Q4, the U.S. real estate market will continue its recovery, further boosting demand for copper in the U.S.

　　V. The current market structure indicates that the copper market remains relatively optimistic. Looking at changes in market structure, although both long and short positions in copper funds on the LME and CFTC have been fiercely contested since the beginning of this year, fund holdings still maintain a net long position. Meanwhile, LME copper futures’ forward pricing continues to exhibit a premium structure, reflecting a shift in consumption toward higher-value segments. Additionally, the upward trend in exchange inventories has shown some positive signs, providing some support for copper prices.

　　In summary, the balanced market condition of global copper prices since the beginning of the year reflects a rotation in global economic drivers and a fragile equilibrium between supply and demand. Both supply and demand are poised to face variables in the second half of the year, which could disrupt the current balanced market conditions. As a result, copper prices are likely to find support and resume their upward trend.

　　(The author, Jing Chuan, is the Deputy General Manager and Chief Economist at Zhongda Futures; a member of the Research and Development Committee of the China Futures Association; a specialist member of the Shandong FOF Research Association and an advisor to Heqiao Think Tank. He previously served as Chief Analyst at Huatai Changcheng, Deputy General Manager and Chief Analyst at CITIC Futures; a regular guest on CCTV’s Securities and Futures Channel; and a specially appointed lecturer at the School of Economics and Management of Peking University.)