CITIC SEC: The turning point in inventory has arrived, narrative acceleration resonates, and copper prices are expected to move towards $12,000.

CITIC SEC released a research report stating that since mid-November, the inflection point of inventory has appeared, combined with the warming of interest rate cut expectations and domestic production reduction fermenting, LME copper prices are expected to accelerate towards $12,000 per ton by the end of the year. Looking ahead to next year, the dual narrative of "American copper hoarding" and "domestic production reduction" is expected to accelerate resonance, and the supply gap is expected to widen by 60%, with $12,000 becoming a new starting point for copper prices. It is fully recommended to allocate copper sector. Key points from CITIC SEC are as follows: The inflection point of inventory will help copper prices accelerate towards $12,000 by the end of the year. Regarding the recent market discussion on the deviation of "high copper prices and high inventory," the current high inventory readings are more influenced by COMEX hoarding, while LME and domestic inventories are not high. Considering the difficulty of COMEX inventory returning under sustained premium conditions, and the fact that LME inventory mainly consists of Chinese and Russian sources, the limited effective inventories in the current market are becoming more fragile, especially in the context of improving global economic expectations and increasing trade risks. It is expected that supply and demand in China will weaken quarter-on-quarter in Q4, but the decline in supply will be greater, leading to a reduction in domestic inventory consumption days to below the five-year average (<10 days) by the end of the year. Historically, the period from the end of the year to 1-2 months after the Chinese New Year holiday has shown a significant rise in copper prices. With the inflection point of inventory appearing since mid-November, combined with the warming of interest rate cut expectations and domestic production reduction fermenting, LME copper prices are expected to accelerate towards $12,000 per ton by the end of the year. Continuation of American copper hoarding combined with the implementation of domestic production reduction is expected to significantly widen the supply gap next year. It is predicted that global refined copper supply and demand will increase by 1.1%/2.1% in 2026, leading to an apparent supply-demand imbalance and a potential further widening of the supply gap by 60% to 450,000 tons when considering hoarding demand. Looking at two driving factors: 1) Uncertainty in tariff policy resonating with high certainty in AI development, American copper hoarding is expected to continue. Despite the unexpected absence of import tariffs on refined copper in the U.S. in early August, the reason for the continued increase in American copper inventories is due to ongoing tariff concerns: 15% may be added in 2026-2027; rapid AI development: if global AIDC capacity increases by 18GW next year, the total increase in copper demand in infrastructure and energy installation, transmission, and distribution fields is estimated to be nearly 500,000 tons. Referring to the hoarding levels during Trump's first term under expectations of infrastructure expansion and tariffs, the level of American copper hoarding since the beginning of the year (750,000 tons in January-August) is not excessive, and hoarding behavior may continue. 2) Domestic production reduction will eventually be implemented, while demand growth may slow down but is unlikely to reverse. Although the cycle of copper scrap supply may lead to a continuous increase in domestic refined copper production (up 23% year-on-year from January to September), under the conditions of rigid shortage of raw materials at the mining end (global production may have been on a continuous decline for four consecutive quarters starting from Q3) and policy determination (consensus reached in 2026 to reduce the copper ore load by 10% under CSPT), the implementation of domestic reduction in primary refined copper production will significantly suppress the overall growth rate of production next year, and the slowdown in end markets such as lithium batteries and white goods will not reverse the overall improvement in supply and demand. It is predicted that $12,000 is both a secure bottom for medium-to-long-term supply and a potential new starting point for upward elasticity. It is expected that the central point of LME copper prices next year will move to above $12,000 per ton. From a cost and inventory perspective, this target price has characteristics of both offense and defense: 1) Cost perspective: over the past decade, the unit exploration cost of global copper mines has increased by over 20 times to above $3,300 per ton, and the investment intensity of new and expansion projects has doubled to above $15,000 per ton, referencing the copper price levels at the peak of the previous capital expenditure cycle, the current stimulus price may move upwards to $12,000 per ton, with a noticeable bottom effect; 2) Inventory perspective: the trend of changes in global apparent inventories this year is most similar to that of 2019-2020, with high similarities in terms of monetary policy cycles, positioning of the domestic "five-year plan," and the development stages of downstream emerging sectors. Referring to the over 50% increase in LME copper prices in 2021, it is advised to pay close attention to the upward elasticity of copper prices next year. Risk factors: Upstream supply growth exceeding expectations; economic growth in China and the U.S. or trade conditions developing worse than expected; peak season demand falling short of expectations; degree of Federal Reserve interest rate cuts falling short of expectations; trading risks arising from unexpected fluctuations in overseas copper prices; operational risks of overseas assets for companies.