CMSC: Short-term focus on copper prices tightening liquidity and changes in geopolitical risks. In the medium to long term, we still see the evolution of supply and demand patterns.

CMSC released a research report stating that as the construction of AI-driven digital infrastructure and the global electrification process accelerate, the role of copper is gradually shifting from a cyclical industrial metal to a key strategic mineral resource. The current copper price is still at historical highs, with both major exchanges rising by nearly 10% since the beginning of the year. Looking ahead, the bank believes that global liquidity, the US-Iran situation, and supply and demand fundamentals will be the three core themes affecting the trend of copper prices: in the short term, attention should be paid to changes in liquidity tightening and geopolitical risks, while in the medium to long term, the evolution of supply and demand patterns should be observed. The main points of view of CMSC are as follows: 1. Why is copper important? Shifting from cyclic industrial metal to key strategic mineral resource. Cyclical and leading. The growth of copper prices is highly correlated with global GDP growth and global manufacturing PMI, with refined copper demand growth typically leading global capital expenditure by about 9 months. Demand side: From industrial metal to strategic resource. The expansion of technology represented by AI is significantly increasing the use of copper in computational infrastructure and power generation. Geopolitics is strengthening the strategic importance of copper, with copper having a significant strategic meaning for national defense purposes. Supply side: Tight pattern under rigid constraints. Firstly, copper resources are highly concentrated, with reserves mainly in countries such as Chile, Australia, Peru, Congo, and Russia; secondly, the development cycle of copper is long, and due to the impact of the previous round of capital expenditure contraction, current new production capacity is difficult to release quickly. Finally, declining grades and resource degradation are raising long-term costs. Current copper production growth has turned negative, and supply remains tight. 2. What is the geometric pattern of the industry chain? The copper industry chain presents a cross-regional mismatch of "resource, processing, consumption". Supply resources are in South America, and smelting is in China. China's refined copper production accounts for nearly half of the global total. Demand stock is in China, and increment is in Europe and America. China accounts for nearly 60%, making it the largest consumer market; however, in the past year, the growth in copper demand has shifted towards the United States and major European countries. The demand drive may shift from relying mainly on emerging economies such as China to a pattern supported by both China and Europe and America. The supply chain is highly concentrated, and its strategic importance is strengthened. Taking China and the US as an example, both countries are important consumer markets. The US has relatively limited copper ore resources and smelting capacity, relying heavily on imports; while China has strong smelting and processing capabilities, holding a pivotal position in the industry chain. Currently, consuming countries are strengthening supply chain security, with resource-rich countries focusing on controlling resources. 3. What drives copper prices? The nature of commodities determines the core, liquidity factors affect price levels, and trading attributes amplify fluctuations. Commodity factors reflect the fundamentals of the copper market, with demand from copper consumption, Chinese industrial value-added growth rate, and the US economic policy uncertainty index used to characterize industrial activity strength and demand expectations. Liquidity factors mainly measure global fund environment and risk appetite, with the US dollar index, US bond yields, and geopolitical risk index reflecting global capital flow, financing costs, and resource liquidity changes respectively. Trading factors reflect market sentiment and fund behavior, with non-commercial net long positions and VIX reflecting market risk appetite, while inventories reflect market expectations for future supply and demand patterns. 4. How is the future trend? Global liquidity, US-Iran prospects, and supply and demand fundamentals are the three core themes. Similar to 2021, the marginal tightening of global liquidity is likely to suppress the metal properties of copper and other commodities. Since May, more than 10 central banks globally have implemented interest rate hikes, and after the European and Japanese central banks landed their hikes, the Federal Reserve is unlikely to exercise its option to cut interest rates. The marginal tightening of global monetary policy will restrain the financial properties of copper and other commodities, with the central point of copper price expected to have difficulty moving upward temporarily. The risk premium of the US-Iran conflict has temporarily weakened, but still carries uncertainty. The price volatility in the early stages of geopolitical shock is essentially a rapid reappraisal of risk premium, and the restorative price increase after the conflict is mainly due to demand replenishment. The bank has always believed that Trump's tactical changes towards Iran this year are related to the midterm election situation. Once the midterm elections are over, the potential for escalation of the US-Iran conflict still remains to be confirmed. In the medium to long term, copper prices are expected to return to the supply and demand fundamentals. Looking at a 3-5 year timeframe, an upward movement in the central point of copper prices can still be anticipated. According to S&P forecasts, the refined copper market will remain in a slightly tight balance around 2030, and the supply gap may further widen after 2030. In addition, the bank has mentioned in several previous reports that the global economy and some assets may undergo a clearance process around 2027-2028, and around 2029-2030, the global economy may enter a new round of Kondratiev wave cycle. Overall, in the short term, copper prices are still disturbed by factors such as marginal tightening of liquidity and geopolitical expectations, but in the medium to long term, the supply and demand pattern remains tight, with clear fundamental support. Of course, US tariff policies will still have a certain impact on the copper price trend, but it is no longer the core contradiction at present. Risk warning: Global economic and policy changes exceeding expectations, geopolitical risks exceeding expectations, tariff policy changes exceeding expectations. 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