Despite an improved risk sentiment, copper price is still sitting at 20% below its April peak mostly from the following concerns:
- Demand slowdown in China as Beijing is attempting to tame inflation and property bubbles
- Recent drop in China copper imports
- “Double dip” in Europe from austerity programs
- Copper is down around 13% for the year so far
The pessimism has prompted some analysts forecasting further downward pressure, or even a catastrophe of the red metal.
On the other hand, much of the focus has been put on China, while some other equally important factors are currently being overlooked by investors. The following sections will highlight some of the emerging trends in the copper market.
China Is Not the Only Game in Town
Copper is a base metal used predominantly in building construction, power generation and electronic products. As such, the metal tends to be highly sensitive to the macro environment.
China is the world’s biggest copper user—about 27% of world copper demand (Goldman Sachs estimate)– followed by the U.S. Since the growth in the United States is likely to be subpar in the medium term, China will likely remain the main catalyst of copper.
However, as other emerging and developing economies race to catch up with the West, China is not the only game in copper town.
A review of the top 10 global mega construction projects (See Graph) identified by Engineering News-Record (ENR) shows multi-billion-dollar projects ranging from the 60-Billion land reclaimation in Egypt to Saudi’s $80 Billion effort to diversity its economy away from oil and gas.
Don’t Forget About India
The head of India’s state-run Hindustan Copper Ltd told Reuters that “India’s copper demand will likely grow by at least 7% in 2010-11 fed by power sector, while demand from real estate and construction remains weak.”
According to Platts, India suffers from a peak power deficit of about 12.7%, and is expected to begin tendering nine major Indian power transmission projects following approval from the regulatory authority.
The projects are estimated to cost more than $12.3 billion in total. There are also other power projects around the rest of Asia as well. (See Table)
These are all indications that copper demand and pricing is also supported by the social and economic evolution outside of China, amid the new normal of global twin-speed growth between Asia and the West.
China Copper Import vs. Demand
Riding on a $586 billion stimulus package and record lending, China imported a record 3.2 million tons of the refined metal in 2009, up 119% from the previous year. So, the recent decline of China copper imports has caused much distress among investors.
Bloomberg’s calculation, based on customs data, shows June shipments of copper and products of China declined 31% from a year ago, and 17% from May. This is a third straight month of such decline. In addition, Xinhua also reported that China’s refined copper imports this year is expected to drop 28%
The drop in imports may be partly attributed to inventory destocking, and not entirely indicative of all the underlying market factors.