China may lose position as copper price driver
Rest of the world likely to take over in the short term amid a slowdown in the country's housing market and an increase in its smelter output
China has in recent years been viewed as the main driver of the global copper market, and while its influence remains strong, it is possible that the rest of the world will take over in the short term.
Copper is currently one of the more divisive commodities among analysts, with opinions split over whether the industrial metal will continue its recent rally or lose ground over the rest of the year.
The point is that considerable uncertainty exists over copper's direction and much of that comes down to whatever view is held about the economic outlook for China, which consumes roughly 45 per cent of the world's copper.
While this is obviously a huge chunk of the market, it still means the other 55 per cent could exert a bigger influence, especially if its demand trend is changing.
London copper prices gained 3.4 per cent between August 14 and Tuesday's close of US$7,054 a tonne, although they are still down 4.2 per cent since the start of the year.
The recent gains have largely been attributed to an improving outlook for growth in the United States and hopes that Europe may take steps to stimulate its struggling economies.
However, Chinese copper prices have also been rising, with the most traded Shanghai contract gaining 4.5 per cent since August 15 to close at 50,620 yuan (HK$63,646) a tonne on Tuesday.
Both London and Shanghai copper have posted strong gains since their year lows in the middle of March, jumping 10 per cent and 16.7 per cent, respectively. Part of this is due to the improving global economic backdrop plus expectations of a Chinese industrial recovery in the second half, but it may also be related to a sharp fall in reported inventories, both in London Metal Exchange and Shanghai Futures Exchange warehouses.
The London exchange's inventories dropped to a seven-year low of 141,275 tonnes in the week to August 15, while the Shanghai bourse's stocks fell to 75,529 tonnes in the week to June 20, the lowest since December 2011.
The International Copper Study Group, in its latest report on August 20, estimated a global deficit of refined copper of 466,000 tonnes in the first five months of this year, compared with a surplus of 251,000 tonnes in the same period last year. It said global copper consumption grew 15.5 per cent in the period, led by a 29 per cent jump in apparent demand in China.
Copper bears, however, point to a range of factors that they expect to act as a drag on demand for the red metal over the short to medium term. In Macquarie Bank's report "10 things we hate about copper in 2H14", five were related to China, with top billing going to the slowdown in housing construction.
An increase in Chinese smelter output was another reason cited by both Macquarie and Goldman Sachs. This is likely to cut Chinese import demand for refined copper for the rest of the year, lowering the 28 per cent growth seen in the seven months to July over the same period last year.
However, it should mean that imports of copper ores and scrap rise to feed the increased smelting capacity. In other words, higher Chinese output of refined copper is only bearish for prices if it is not matched by decreased output elsewhere.
Rising production of refined copper in China may actually result in higher prices for ores and concentrates and help soak up an expected increase in mine output in the second half as Indonesian exports resume.
It is likely that slower housing construction will be a drag on Chinese copper demand, but this may be a temporary situation as signs emerge that many cities in the country are starting to ease property curbs to stimulate the sector.
There also remains a question mark over the so-called dark inventories of copper in China, those that sit outside the Shanghai exchange's system and are largely tied to commodity financing deals.
Or it could be that global demand excluding China improves enough to absorb the refined copper that may not be imported by the country in the second half of the year. It seems monitoring demand in the rest of the world may be more important than looking at China's copper consumption in the short to medium term.