Copper’s tumble blamed on China

By Joe Salimando

Copper’s price hit a three-month low on the April 13 close in New York trading, with “front-month copper” (April delivery) hitting $3.623 per pound, according to The Wall Street Journal.

What has happened? The WSJ article blamed China’s slowing growth—announced April 13 at 8.1% for Q1/12.

However, that “below-expectations” data point—economists had guessed at an 8.3% gain—came out against a backdrop that saw China watchers interpret signals from that country’s government.

China steps on the brakes

In a recent Economic & Copper Advisory from Simon Hunt Strategic Services, Hunt discusses a visit to China. After the visit, Hunt projected annual copper growth in the 8.0% to 8.5% range.

Two significant points from Hunt:

  1. China’s “12th Five-Year plan gives the game away with [annual real GDP growth]…targeted at 7%… [this] signals that slower growth is acceptable.”
  2. “Between 1990 and 1999, China’s GDP deflator averaged 10.7% a year and the country’s real GDP [grew] by 7.8% a year. Since then and including 2011, the GDP deflator averaged 9.7% a year but real GDP [growth] by only 4.3% a year.” “…The deflator data suggests that China’s real inflation is rising by 61% every five years. That is not sustainable, and is one reason why government is keen to restructure how the country has financed growth.”

Evasive action continues

Separately, a recent blog post at EconMatters talked about the Chinese “carry trade” in Copper—something discussed in the tEd magazine’s Commodity Column in July 2011. 

Apparently, despite the fact that this use of copper—as collateral for loans—is an end-run around Chinese government limits on lending, it’s still happening.

According to EconMatters, China’s “imports in the first two months this year were 50% higher than the same time last year (see chart). However, rather than a sign of strong end user demand, a lot of the stockpile copper will never get shipped out to end-users because they were bought for speculative reasons.  

“Traders are using copper as collateral for other investments—offshore yuan forwards and interest rate differentials seems to be the most popular trade right now.”

Longer-term perspective

A September article in The Economist included a section that might have been headlined “Peak Copper?” Below is an excerpt:

“New copper supply is going to be increasingly dependent on smaller mines that are deeper underground and have lower ore grades. As Gayle Berry of Barclays Capital notes, these mines will also mainly be in riskier parts of the world…

“…The lack of vital infrastructure such as roads, railways, power and water, and the ever-lengthening process of getting mining permits, will make the newer mines far more costly.

“…Lead times for new projects, once four to five years, have crept up to between seven and eight years.

“Wringing extra copper out of existing mines has its difficulties too…As older mines get deeper, ore grades decline and extraction becomes more expensive. The disruption rate (the amount of promised copper that fails to materialise), about 2% five years ago, is now as high as 8%, according to Andrew Keen of HSBC.”

Bottom line

Spot-market copper prices may yet range lower in 2012. EconMatters claimed to see “major support” at $3.30/pound, meaning, in at least that one point-of-view, prices are unlikely to go much further below that.

Many will remember 2008 as the ultimate elevator ride when copper flew up over the  $4.00/pound price at mid-year, only to sprawl on the floor at $1.25/pound by December.

Is it important to follow moment-to-moment economic moves in China, in order to project short-term copper price moves? Or does the future—one with Copper harder to find, harder to mine, and more costly to pull out of the ground—take precedence in one’s thinking about wire and cable?

Certainly, the answers will vary with each distributor’s approach to the market, customer types, and products offered.

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