In the past few weeks, Shanghai Copper’s May contract has surged sharply, while the far-month contracts have remained relatively stable. This has led to a significant widening of the contract price spread, which has gradually eased due to spot sales and increased copper imports. The author believes that this rebound in Shanghai Copper is not just a temporary rally but signals a potential shift in market dynamics. With the end of the peak consumption season, the copper market is expected to see a change in supply and demand patterns in mid-to-late May, leading to a transition from a short-term bullish to a long-term bearish outlook for the second quarter. The near-term strength in the copper market has been driven by tight domestic supply conditions. Prices have slowly recovered from the losses seen in March, and the contract structure shows clear signs of a backwardated market, where near-month contracts are priced higher than those further out. As of May 13, the spread between Shanghai Copper 1405 and 1408 reached approximately RMB 2,300 per ton, an unusual level in recent years. This near-strong and far-weak pattern is closely tied to the expiration of the May contract. According to the latest inventory reports, as of May 9, exchange copper inventories had dropped to around 90,000 tons, with tax-deductible stocks in Shanghai at only 24,000 tons. The positions on the 1405 contract fell sharply from 30,000 hands on May 12 to 13,710 hands by May 13, indicating that some traders were approaching delivery. With limited access to low-cost sources, short-term settlement activity has played a key role in supporting the recent rise in copper prices. However, the author argues that the current tightness in the spot market is unlikely to be sustained. A cyclical pattern—starting with rising import losses, followed by difficulty in importing copper, high spot premiums, and eventually lower import losses and falling spot prices—is expected to take hold. This suggests that the current tightness will likely ease, and the elevated spot premium may not last long. Looking ahead, supply pressures remain high, while demand growth remains weak. Despite state reserves taking copper and smelting exports, real domestic demand is stable, and there is no significant increase in downstream stockpiles. After the May delivery, arbitrage activities could push the market back toward rationality. With global supply pressures and weak demand growth, the overall copper market is expected to face oversupply, pushing prices into a bearish trend. According to Wood Mackenzie, a commodity consulting firm, the 90th percentile of global copper mine cash costs (C1) is around $5,800 per ton. In 2014, global copper supply is estimated to have increased by 871,000 tons. Although the growth in mine capacity during the first quarter was slightly below expectations, May’s imported copper TCs remained stable at $100–$110 per ton. With ample concentrate supplies and higher processing fees, domestic smelters are incentivized to operate at full capacity, maintaining strong supply pressure. As the peak consumption season comes to an end, historical patterns suggest that copper demand growth may face downward risks. Limited ability of copper processors to sustain order increases, combined with the recovery of internal and external prices, could lead to reduced import losses and increased selling at rallies. This would support a shift in the domestic supply-demand balance, weakening the support for Shanghai copper prices. From a macroeconomic perspective, the environment remains neutral, with supply and demand fundamentals continuing to drive the market. While the government’s "micro-stimulus" policies have shown some effectiveness since March, April’s overall economic data showed stabilization, though most indicators were below expectations. China’s annual PPI fell by 2.0% in April, and key economic figures such as fixed asset investment, industrial output, and retail sales all came in lower than anticipated, highlighting the ongoing challenge of weak domestic demand. At the Central Political Bureau meeting at the end of April, decision-makers acknowledged that China’s economy is within its annual target range but still faces downward pressure. They emphasized maintaining the existing fiscal and monetary policy stance, without introducing large-scale stimulus measures. Under this policy framework, the macroeconomic environment is expected to remain stable in the second quarter, with supply and demand dynamics continuing to shape the market outlook. In conclusion, the author expects the copper market to gradually transition from short-term to long-term operations in the second quarter. While the short-term rally may continue, the long-term outlook for the copper market remains bearish, with the Shanghai Copper 1408 contract likely to attract short-selling pressure.

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