By Vivian Ni
Oct. 24 – The debt crisis in Europe as well as the struggling economy in the United States may cloud the prospect of China’s demand for copper, which is usually regarded as an important indicator for global copper market prices, a recent Reuters poll shows.
Global consumption may decline
The survey, conducted by 10 analysts two weeks ago, shows an average estimation of 6.3 percent growth in real Chinese copper demand (excluding the demand for stockpiling) in 2012, down from the previous forecast of a 7 percent to 9 percent increase next year.
Stephen Briggs, analyst at BNP Paribas, believes that the current economic issues across Europe and the United States could downsize China’s role as the world’s largest copper consumer, and then affect the country’s copper demand.
“Everybody says China accounts for 40 percent of global copper demand, that overstates the country’s role because the copper goods are made in China, but ultimately they are consumed elsewhere,” said Briggs.
As seen by the experts, the recent copper price trend did appear sensitive to the development of the Euro Zone Debt Crisis. Amid investors’ fears of a failure by European politicians to reach a resolution on the debt crisis – as well as the potential default by some countries such as Greece, Portugal and Ireland – three-month copper prices on the London Metal Exchange marched downwards most of last week. However, the market rallied by 3.9 percent on Friday right before the European leaders summit which managed to move closer to a revamped strategy that may help contain the euro zone’s debt troubles.
Replenishment has not yet started
While the financial crisis in the West may heavily affect global copper consumption and China’s real demand for copper, growth in China’s apparent demand could also slow down due to importer hesitation on immediate replenishment. Leon Westgate, analyst at Standard Bank, revised down his forecast for the increase in China’s apparent copper demand next year from the previous 8 percent to 7 percent.
Statistics indicate that China’s copper stockpiles may still remain at a relatively high level, despite a reasonable amount of consumption. The country’s total monthly imports of unwrought copper and semi-finished copper in September hit a 16-month high, increasing by 11.8 percent.
“China’s market participants have drawn on refined copper inventories to the tune of 380,000 tons in recent months. This has reduced excess stocks to around 300,000 tons,” said Michael Widmer, analyst at Bank of America Merrill Lynch.
However, Widmer believes a new round of sustained stock rebuilding has not started yet, due to “the current market metrics and China’s tight monetary policy,” but only “some inventory replenishment” is possible.
Westgate also expressed a similar opinion, adding that the price factor is also affecting China’s copper replenishment.
“Chinese buying is highly price-sensitive and we do not expect current (import) activity to morph into a major restocking episode,” Westgate said.
The real picture of China’s stockpiles?
A recent commentary in the China Securities Journal made an even bolder estimation on China’s current copper stockpiles. Citing officials from the China Nonferrous Metals Industry Association (CNMIA), ones who attended the recent International Study Group meeting in Lisbon, the commentary pointed out that China’s actual copper stocks are much higher than international statistics. The external data only factored in the need for copper consumption, but not for other purposes such as financing, emphasized the commentary.
In a tightening monetary environment, copper imports are used by many cash-strapped enterprises as an avenue of obtaining low-interest capital from Chinese banks. These companies – which use a letter of credit to make banks pay for their spot copper orders overseas first and allow them to pay back the banks later – are able to receive a fund that’s equivalent to a 90 to 180-day loan through the sale of the spot copper and the delayed payback.
Therefore, the Chinese commentary believes China’s demand for copper may “cool down” significantly and copper prices will keep slipping from the current level of around US$7,000 per ton.
In contrast to China’s extremely bearish market prospects, Western analysts sounded more positive on the generally “robust” future growth in China’s copper demand, as they see the government still has a strong commitment to construction and infrastructure development.
“Production of power cables, for example, is up 30 percent year-to-date … Clearly, fabricators’ usage of cathode remains high overall, and so their inventories continue to be run down,” said Westgate.
The highlighting of China’s high copper stockpiles by CNMIA officials may also be a reflection of the country’s real demand in the longer term, according to some Western voices. Increasing comments on a supply-demand surplus could help drive down copper prices even further and would ultimately benefit the world’s largest metal buyer.
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