Since March, copper prices have shown an interval fluctuation trend. The main supporting factors are tight supply expectations, and the main suppressing factors are inventory accumulation and insufficient demand highlights. Macroscopically, China’s economy is still under downward pressure, but with the implementation of the tax and fee reduction policy, it should not be overly pessimistic in the long run. In the short run, we still need to pay attention to the impact of the March Fed interest rate meeting and the UK’s delisting on financial markets. On the supply and demand side, TC continues to decline, suggesting that copper concentrate supply is tight, demand side performance is relatively stable, and the impact on copper price is neutral. Generally speaking, the impact of supply and demand on copper price is slightly more neutral, but we need to pay attention to the impact of macro factors.

Accumulation of macro-uncertainties

According to the data released by the National Bureau of Statistics, the annual growth rate of industrial added value in the first two months or more dropped by 0.4 percentage points compared with December 2018, but the annual growth rate of national fixed assets investment and national real estate development investment both rebounded. Thus, downward pressure still exists in the economy. In this context, Premier Li Keqiang of the State Council proposed to reduce VAT on April 1 and social security premium rate on May 1 to reduce the burden on enterprises. In the short run, the price of long-term contracts will be under pressure, but in the long run, it will help to improve the profits of enterprises and promote consumption. China and the United States may reach a trade agreement in mid-early April, which is expected to be more optimistic, but we still need to be vigilant about the variables.

In the international situation, the Federal Reserve held a meeting on March 20 to keep the target of the federal funds rate unchanged. Therefore, the impact on copper price is relatively small. In addition, with the approaching date of March 29, the situation of Britain’s exit from Europe is facing greater uncertainty, and we need to be alert to the risk that the pound will weaken and the dollar will strengthen passively.

Increased expectations of tight supply

The TC of copper concentrate continued to decline after the Spring Festival due to frequent interference at the mine end and the introduction of domestic smelting capacity. In February, the crude refining cost of copper smelters fell to $79.5 per ton, which has fallen below the $80.8 per ton long copper concentrate list in 2019. The average TC price of copper concentrate imported last week was US$72.5 per ton, continuing the trend of decline, reflecting the tight supply situation at the end of the mine, which has strong support for copper prices. According to the supply of refined copper, the output of refined copper in China was 1.34 million tons in the first two months of 2019, and the cumulative growth rate fell to 6.3% year on year. At the same time, the second quarter will usher in the peak of domestic smelters’overhaul, mainly Xiangguang Copper and Jinlong Copper. It is expected that the output of refined copper will be seriously affected and the futures price will be boosted to a certain extent.

At present, the market is concerned about inventory accumulation. Due to the centralized delivery of LME copper, LME copper stocks increased by about 747,000 tons on Thursday and Friday, while domestic stocks continued to climb. As of March 19, the number of warehouses in the previous period had exceeded the same period in 2018, reaching about 175,500 tons, and social stocks were also increasing. Thus, although the medium and long-term supply is expected to be tight, the short-term inventory is relatively abundant to provide security for supply. Later, if the inflection point of inventory appears, the pressure on copper prices will also be weakened.

Relatively stable demand

Last week, copper rod market orders were general and end cable customers purchased on demand; copper pipe enterprises had stable production and stable increase in market orders, but small-scale production and processing enterprises were still not optimistic; copper strip market orders were stable and better, but under the downward pressure of the economy, confidence in the future was insufficient; copper rod market start-up rate was stable, and the order situation was general.

According to SMM survey, the average start-up rate of copper enterprises in February was 48.75%, which was 19.2 percentage points lower than the previous year, down 1.69 percentage points. It is estimated that the average start-up rate of copper materials in March is 77.38%. In the first two months of 2019, China’s copper output was 2.11 million tons, with a cumulative growth rate of 14.6% year on year; in the first two months, China’s air-conditioning output was 27.885 million units, still at a relatively high level, with a cumulative increase of 6.2% year on year; due to the peak production season, air-conditioning output is expected to rebound significantly in March. Overall, demand is relatively flat, and the impact on copper price is neutral.

In summary, there is a conflict between tight supply expectation and rapid inventory growth and insufficient demand highlights in the current market. Later, the tight supply situation at the end of the mine will gradually transfer to the middle and lower reaches, and the peak of smelter overhaul will be approaching. The production of refined copper will be affected or the supply side will be strongly supported. On the demand side, the market’s pessimistic expectations are basically reflected on the market. With the support of domestic fiscal policy, we should not be too pessimistic. Therefore, it is suggested to be cautious and optimistic about copper prices. The main force of Shanghai copper is temporarily concerned about the pressure at the 50,000 yuan/ton integer level above, so it is not advisable to catch up with the increase.

In this year, pollution control has become a hot spot again. The report calls for the continuous promotion of pollution prevention and control, and consolidation and expansion of the achievements of the Blue Sky Defense War. It is required that this year’s emissions of sulphur dioxide and nitrogen oxides should be reduced by 3%. Continuous efforts should be made to tackle air pollution in Beijing, Tianjin, Hebei and its surrounding areas, the Yangtze River Delta and the Fenwei Plain, and to strengthen the control of industrial, coal-fired and motor vehicle pollution sources. To strengthen the prevention and control of water and soil pollution, this year’s chemical oxygen demand and ammonia nitrogen emissions will decrease by 2%.

Since the pilot project in Hebei Province at the end of 2015, the environmental storm has lasted for more than three years, with great efforts and wide scope. In 2017, it has achieved full coverage of 31 provinces in the country; in 2018, more than 200 inspection teams were dispatched to carry out pull-net inspection, especially for the “scattered and dirty” enterprises that are not in place, the obsolete coal-fired boilers, the illegal production of non-pollution treatment facilities, excessive emissions and other issues found together and handed over publicly. In 2019, Li Ganjie, Minister of Ecological Environment, said that it would take four years for China to complete the second round of central ecological environment protection supervision and “look back”.

With the increasing pressure of environmental protection, the impact on compound fertilizer is also growing. As we all know, the pollution of compound fertilizer is mainly wastewater, dust, air pollution, and so on. Some enterprises that use phosphate ore as raw material also have the problem of stacking and disposal of phosphogypsum. The dechlorination process also involves hydrochloric acid. Beginning in 2016, with the increasing frequency of environmental protection inspection, the phenomenon of production restriction and parking of compound fertilizer plants has increased. For those devices that fail to meet the standards, they are required to rectify and upgrade environmental protection equipment. For those devices that are polluted heavily, they are required to relocate and enter industrial parks on the edges of Taihu Lake and Yangtze River Basin. According to incomplete statistics, in 2018, the capacity of the main enterprises with abnormal production and parking for more than three months has exceeded 3 million tons.

Compound fertilizer has a large production capacity, but its effective utilization rate is low. With the advancement of environmental protection, it is conducive to quickening the withdrawal of backward production capacity, accelerating the process of industry shuffling, and thus promoting the healthy development of the compound fertilizer industry.

U.S. WTI crude oil May futures closed down $0.25, or 0.42%, at $59.98 a barrel on Thursday (March 21). Brent Crude Oil May Futures closed down $0.64, or 0.93%, at $67.86 a barrel on Thursday. The strong rebound of the dollar after yesterday’s sharp fall has increased pressure on oil price recovery, and market expectations that Iran’s crude oil import exemption may be extended, which has also put some pressure on the positive impact of OPEC’s production cuts. WTI crude oil futures in the United States hit the lowest of 59.66 U.S. dollars per barrel, Brent crude oil futures prices hit the lowest of 67.69 U.S. dollars per barrel.

Fundamental positive factors:

The U.S. Energy Information Agency (EIA) reported Wednesday (March 20) that U.S. crude oil stocks had fallen by 9.589 million barrels to 439.5 million barrels in the week ending March 15, the largest weekly decline since July 13, 2018 (36 weeks), with the market forecast increasing by 309,000 barrels. More data showed that Kuxin crude oil stocks in Oklahoma fell 468,000 barrels last week, falling for two consecutive weeks. U.S. refinery stocks fell by 4.127 million barrels, the biggest one-week decline since the week of December 21, 2018 (13 weeks), with a market forecast of 1.094 million barrels. U.S. gasoline inventories fell by 4.587 million barrels, down for five consecutive weeks, with a market forecast of 2.414 million barrels.

In a recent interview, Saudi Energy Minister Falkh said that the process of rebalancing the crude oil market is far from over and that there should be no oversupply in the crude oil market. At the same time, it pointed out that the oil market could not achieve balance in the first half of this year, but crude oil stocks are expected to decrease by May. It also said that crude oil will not be in an unguided state in the second half of 2019. This makes the market more confident that the reduction will be extended to the end of this year, thus providing effective support for oil prices. In addition, Falkh hinted that OPEC + could reduce production by more than 1.2 million barrels per day, pointing out that only one member country currently overfulfills the task of reducing production every month, namely Saudi Arabia itself, but he did not think that Saudi Arabia would always bear such a heavy responsibility alone. This seems to mean that countries such as Russia have to attach greater responsibility, and the Russian energy minister has responded positively to this, but said it is difficult to reduce production too early for the time being due to seasonal factors in winter.

Data released by Baker Hughes on Friday (March 15) showed that the number of active oil drilling wells in the United States had dropped by 1 to 833 in the week ending March 15, the fourth consecutive week of decline, the first time since May 2016, when it had declined for eight consecutive weeks. At present, the number of active oil drilling wells in the United States has reached the lowest level since April 2018, which was 800 in the same period last year. More data show that the total number of active oil and gas drillings in the United States fell by 1 to 1026 by the week ending March 15.

Fundamental bearish factors:

In the U.S. market, bulls suddenly launched a counter-offensive, the dollar index accelerated near 50 points to 96.63 in the short term, erasing the decline after the Federal Reserve resolution, out of the U-shaped reversal market. Some analysts believe that the trend of the dollar is similar to that of the euro after the last ECB meeting, and the market reaction may be overdone. As the dollar continued to rebound, Sterling plunged more than 100 points to 1.3003 in the short term.

Iran’s crude oil import exemption expires in May, and there is widespread expectation that President Trump will extend the exemption, even though he has been claiming plans to cut Iran’s crude oil exports to zero. Market analysts believe that if countries’import exemptions can be extended, it will inevitably weaken the positive impact of production cuts to a certain extent, thus limiting the rise in oil prices.

The U.S. Energy Information Agency (EIA) reported Wednesday (March 20) that domestic crude oil production increased by 100,000 barrels to 12.1 million barrels a day last week, returning to a record high as of March 15.

Uncertainties in the Sino-US trade negotiations still constrain the space for oil price rebound. Foreign media reported that the Sino-US Leaders’talks will not be held this month, but at the earliest, they will wait until early April. The talks are expected to reach a final trade agreement. In addition, signs of a global economic slowdown are increasing, fearing to drag down the performance of crude oil demand. According to data released by the National Bureau of Statistics, in January-February 2019, the value-added of industries above the scale increased by 5.3% year-on-year, which was lower than expected, while creating the slowest growth rate since the beginning of 2002. According to estimates, excluding the influence of Spring Festival factors increased by 6.1%. From a ring-to-ring perspective, in February, the value added of industries above scale increased by 0.43% over the previous month.

After the recent ECB policy meeting, President Draghi pointed out that the European economy was experiencing “a period of sustained weakness and general uncertainty”. In February, the growth of non-farm employment in the United States almost stagnated, with only a slight increase of 20,000. Analysts believe that the long closure of the government has a significant impact on this. Meanwhile, there are signs of slowdown in the economies of Europe, the United States and Asia, which makes the market worried about the performance of crude oil demand.

Propylene prices fell sharply in March and fluctuated more than expected. While the price of propylene has changed dramatically, the prices and profits of many downstream products are also constantly changing, and there are many consistencies and differences with propylene. Overall, the correlation between propylene and downstream products is still strong, and the supply and demand side is still the main factor affecting the propylene market in the later stage. The propylene market will be stabilized in the short term, and the price fluctuation space will be significantly reduced.

In March, the propylene market was very busy, with market prices falling sharply at first and then rising sharply. The mainstream price of propylene in Shandong Province dropped from 7600 yuan/ton in late February to 6400 yuan/ton, a drop of 15.8%, while the current price has risen to 7300 yuan/ton, an increase of 14.1%. Recently, the market has entered a stable period, and the mainstream price of propylene in Shandong has stabilized at 7200-7300 yuan/ton.

There are many downstream products of propylene, and there is a strong correlation between propylene and many downstream market changes. Propylene prices soared and plunged in March, so what is the downstream market trend?

In March, the downstream of propylene showed a high-opening and low-going trend, and the prices of most products have declined by different margins compared with the beginning of the month. The main reason is that on the one hand, the supply and demand of different products are different. On the other hand, the sharp change of raw material propylene price also leads to the continuous change of downstream product cost, which has a greater impact on the market trend.

From the point of view of specific products, only acrylonitrile prices in downstream products have increased since the beginning of the month, mainly supported by the overhaul of the outer disk and marine power plant. The prices of other downstream products have fallen, of which epichlorohydrin and acetone have fallen relatively large, mainly due to the contradiction between supply and demand.

It is difficult to see the correlation between propylene and downstream price changes. Compared with the downstream, propylene price changes frequently and quickly. In about half a month, propylene has experienced a sharp fall, a sharp rise and a stable price, while most downstream prices change relatively slowly.

From the monthly average, the average price of propylene in March was 7.84% lower than that in February, and the price center continued to move downward. Among the downstream products, the average price of acrylonitrile and octanol in March was higher than that in February, while the prices of other products declined by different ranges.

From the monthly average price comparison, it can reflect the correlation between the price changes of propylene and downstream products. Propylene price center of gravity declined, downstream product cost support weakened, price center of gravity also fell. Although sometimes downstream product price changes will lag behind, but the market remains consistent. However, downstream product prices fell less than propylene, which also reflects the weaker propylene market.

Judging from the downstream profit situation, up to March, the downstream still maintains a large profit margin, and most downstream products’profits have risen by different margins compared with February.

As we mentioned above, the average price of most downstream products in March has declined by different margins compared with February, but the profit margin has increased. This shows that the main reason for the expansion of profit margin of downstream products lies in the large drop in cost, i.e. the large drop in the gravity center of propylene price, which is verified by the previous analysis. This indicates that the profit of propylene industry is transferred from propylene downstream in the near future, and the direction of transfer may change in the later period.

Outlook for the future

After a sharp decline and rise, the propylene market has stabilized in the near future, and the price center of gravity has returned to a relatively reasonable space. However, the recent market of some downstream products is relatively weak, and the price focus has continued to decline. This reflects the trend of price recovery between propylene and downstream, with some downstream profit margins narrowing expectations.

In the later stage, the supply and demand side is still the most important factor affecting propylene, which needs continuous and close attention. On the supply side, the spring overhaul season has been gradually opened, and some refineries in Shandong have entered the overhaul; on the outside side, some equipment in Japan, Korea and other places are also expected to be in stock for overhaul, and the supply of the outside will gradually decline. Reduced supply will boost the market mentality and substantially reduce the supply pressure of enterprises. On the demand side, downstream demand needs to continue to recover. The impact of the continued decline in polypropylene futures and spot prices on the stock and profit margins of the propylene market, and some downstream maintenance facilities need to be restored. Overall, propylene market pressure is expected to ease in the later period, but the range is limited. As far as the current situation is concerned, the mainstream price of propylene in Shandong Province is relatively reasonable between 7000-7500 yuan/ton. There will be no sharp rise or fall in the market in the short term, and stable consolidation will be the mainstream trend.

According to media reports, since the beginning of 2019, the price of disperse dyes has come to an end, and related products have witnessed two rounds of increases on January 1 and February 12. Recently, the transaction of disperse dyes has been gradually active, and a new round of increase was welcomed on March 18.

At present, the dyestuff demand peak season has come, dyestuff demand of printing and dyeing enterprises will increase, and this year, the stock of printing and dyeing enterprises and distributors before the Spring Festival has decreased compared with previous years, which will further increase dyestuff rigidity demand of printing and dyeing enterprises. It is expected that the factory price of disperse dyes will continue to rise in the first half of this year, and the performance of industry companies is expected to improve. Relevant companies include Zhejiang Longsheng, Runtu Shares, Jihua Group, etc.