Dalian correspondent Mark Downing looks at China’s slackened copper demand.
China’s recent surge in copper imports is not indicative of a rebound in China’s economy but likely low-price restocking. Demand for the third most widely used metal in the world is oft regarded as a bellwether of the economy. But the recent surge in imports is largely due to manufacturers and China’s State Reserves Bureau taking advantage of six-year low prices to restock, rather than representing increased industrial consumption.
This highly conductive and malleable metal literally winds up in telecommunication wiring, electric power generation and transmission equipment as well as plumbing and building materials. But sagging consumption — down 24% this year to the lowest since 2009 — suggests that the world’s second largest economy is facing its weakest growth in a quarter century as it transitions from state-sponsored investment towards consumer-led economic growth.
China has the sixth biggest copper reserves in the world, at 4% of the total, yet is the second largest copper miner. Since 2002, China has been the world’s largest consumer of copper ores, anodes, and refined copper, accounting for up to 45% of the 23m tonnes of global copper supply. China’s processing and refining capacity have grown significantly over the past decade with now more than a third of global copper smelter production. China’s refined copper production has increased as it processes more foreign ore amid a global glut. Output rose 6.8% in the first 10 months from a year earlier at 6.5m tonnes.
When China’s copper demand growth peaked it was importing copper ores predominantly from Peru and Chile and scrap from the US for smelting and refining. A September Golden Sachs forecast has copper demand set to rise by 3% a year through 2020. Demand has slowed from 6% last year and 11% in 2013.
Imports of refined and semi-finished copper products jumped by more than 30% in September to 460,000 tonnes compared to August and 18% in the same month last year. It was the highest monthly shipment total since January 2014 and the first rise since June of last year. But overall year to date imports are still lagging those of 2014, falling 5.5% to 3.4m tonnes.
However, financial and arbitrage schemes muddy the measure of China’s actual copper consumption. Witness last year’s Qingdao port scandal – such metal commodity financing got out of hand as stockpiled metals were allegedly pledged multiple times as collateral. Credit Suisse estimated earlier this year that up to a third of Chinese copper imports were leveraged to tap cheap US dollar loans or for interest rate arbitrage. Such copper commodity financing has now been much diminished.
Further, Chinese hedge funds have used copper as a proxy to bet against the Chinese economy. Prevented from spreading rumours about Chinese stocks, speculators turned to copper, aided by inadequate data on domestic stockpiles.
Some analysts expect a recovery in China’s housing market, with increased bank lending to property developers and homebuyers in the third quarter and the government promising to invest around $315bn in power grid infrastructure, particularly in inland cities. However, corruption investigations earlier this year at state-owned energy companies have slowed grid deployment. Moreover, aluminium is increasingly being used as a substitute for thick power-distribution cables.
But a recovery through housing may be some time coming. With a surplus of unsold properties, housing completions have dropped by 15% this year and housing starts are even weaker. Additionally, copper is installed post-construction as wiring, piping, air conditioning and within home appliances.
Long-term, the intensity of copper usage in China is likely to grow as average incomes rise. China is well below the level at which copper consumption peaked in Japan. China’s push towards renewable power generation and electric vehicles show promise of increased demand.
The Silk Road initiative will likely disrupt seaborne flows as China will source and process significant copper reserves from neighbouring countries along the ancient trade route. By the end of the decade, Mongolia is poised to build the world’s largest copper and gold mine nestled across the border with China.
Overall, China’s imports of this red industrial metal are expected to remain weak well into next year owing to weak industrial consumption, increased domestic stockpiles and less metal used for collateral financing.
This article first appeared in the latest issue of SinoShip magazine, to coincide with this week’s Marintec China exhibition. Readers can access the full magazine online for free by clicking here.