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Looking at the current copper industry fundamentals, the most prominent is the ultra-low level of global dominant inventory and continued destocking performance. In the previous annual report, we mentioned that the underlying trading logic for this year is that copper inventories are low and consumption is expected to be good. In a blink of an eye, January will come to an end. Overseas inventories are falling, while domestic consumption has weakened, however, the downstream replenishment is still not finished, and the time point of accumulation lags behind that of previous years. This paper intends to look at the evolution direction of inventory in the later period through some recent changes in inventory: First, when will the overseas inventory go to storage; second, when will the domestic inventory accumulate, when will it end and how high will it be.

1.Overseas inventory -- until when will it continue to be unstocked

As of January 21, LME copper stocks were at 94,000 tonnes worldwide. Looking at the changes in LME copper stocks over the past six months, it is clear from the chart below that in October last year, lME Copper Warehouses, which are mainly located in Europe and the US, are in the stage of the second outbreak of the overseas epidemic, some of Europe's main warehouses saw a rapid rise in inventories, but the deliveries did not show sustainability. As Manufacturing in Europe and the United States continued to recover at an accelerated pace, inventories quickly returned to destocking, first came the continued decline of warehouses in New Orleans, North America, from 53,000 tonnes to 17,000 tonnes, followed by a gradual decline of 90,000 tonnes to 43,700 tonnes in Rotterdam, Europe's main warehouse.

Another characteristic of LME copper inventory changes is that the proportion of registered warehouse receipts has remained high for a long time, this paper analyzes the performance characteristics of three variables in the process of price rising and price falling from the angle of raising the price and writing off warehouse receipt.

Therefore, in the third quarter, copper inventories fell to a new low for the year due to the overseas resumption of production, and LME copper rose $20/ton every three months, the proportion of written-off warehouse orders rose to a year-high of 60% ; This was followed by a sharp increase in the number of registered warehouse receipts in October, although global copper consumption is expected to be better, with low interest rates and liquidity easing, and copper inventories returning to de-stocking, write-off ratio is basically in more than 30% of the high, but also to the copper price strong support. From the point of view of the volatility of the ratio of written-off warehouse receipts, it can be seen that the data changes in recent months show a cyclical feature, with a cycle of about 30 trading days, going from up to down.

From an overseas perspective, overseas demand in the first quarter of this year is expected to drive a strong global investment in industries related to new energy development and research, giving stronger support to copper prices, but falling into reality, whether in Europe or the United States, the number of people affected by the outbreak remains high, the blockade period has been extended, the delivery of vaccines is in the initial stage, the sustainability of the manufacturing boom is in doubt, and weak consumption may slow down the restocking of producers at a certain stage, therefore, based on the previous analysis and the law of the change of the proportion of warehouse receipts written off, it is unlikely that LME copper stocks will be reduced to a new low of more than 70,000 tons last year, lME Copper inventories have slowed down and are likely to recover by the end of this month, when high copper prices may be under some pressure. As LME copper inventories are often traded centrally, the strength of LME copper accumulation in February is of concern, we believe the level of activity is likely to be similar to last October, with inventories forecast to rise to between 150,000 and 200,000 tonnes and remain low by comparison with previous years.

2.The inflection point and height of domestic inventory

The seasonal variation of domestic inventory is very strong. In the first quarter, due to the Spring Festival effect, downstream production demand slows down, inventory will start to accumulate. After the Spring Festival, orders will pick up and factories will reopen, spot demand will drive inventory in the second quarter began to dematerialize. From the chart year-on-year comparison, domestic exchange inventories are also at historically low levels, less than 100,000 tons. On the positive side, first of all, although the high copper price has a certain inhibiting effect on the reserve stock before the next festival, the discount and spot transactions tell us that due to the limited supply of circulating goods in the market, the dominant inventory is very low, traders'favourable sentiment was strong. When the price of copper dropped below 59,000 Yuan/ton in January, the downstream inquiry positively indicated that there was still a certain demand for reserve stocks. As a result, stock on the exchange was still being depleted in January this year, while social stocks were also falling.

The second point, shown in figure 6, is the ratio of positions held to warehouse receipts for the month of the contract. This year, the ratio of positions held to warehouse receipts was steeper for the month of delivery when contracts 01 and 02 became available, although in the end did not form a "long bear" , but the reason is warehouse receipts inventory is too low, the seller is not willing to be delivered in the near future, may be bullish on the future price of copper; the buyer wants to be delivered in the near future contract, because the spot premium, long-term structure of the premium, and the fear of late copper prices have high points. The fact that both the buyer and the seller are acting on the basis of a positive response to the copper price is also a positive sign.

Source: MEERYA Futures, author, Jeff Zhang