China and Copper: Inextricably Linked on the World’s Markets

Apr 28, 2014 02:33 GMT   Source:Investing News Network

Thursday April 24, 2014, 4:30pm PDT
By Teresa Matich - Exclusive to Copper Investing News

China has long been enamoured with the red metal. The world market is tightly tied to demand from the Asian nation as any signal of a change in its appetite for copper is usually a fundamental factor in price changes; however, China could soon be able to meet its own needs.

Case in point; a recent earthquake in Chile near mines in the world’s top copper-producing nation did little to budge the markets in early April, but Chinese Premier Li Keqiang’s statement that the country will not use short-term stimulus to help economic growth supported worries about easing copper demand while copper prices dropped last Tuesday. Over the next two days, uninspiring economic growth from China caused the metal to cautiously rise, a change that illustrates how closely the metal’s weather vane sways with the wind of perceived Chinese demand.

Stocking up

On Wednesday, Reuters reported that the Asian nation is stockpiling copper again, noting that the State Reserve Bureau has purchased roughly 200,000 tonnes of imported bonded copper stocks. Beijing does not release the exact amount of copper held by the state, but traders estimate that stocks in Shanghai currently amount to 650,000 to 700,000 tonnes; the state has plans to drastically increase its copper stocks by 2015.

That could be good news for top copper producers outside of China. While Chile has long claimed the largest copper output, Peru is gearing up to be the second-biggest copper miner globally, with several large projects in the pipeline, according to Bernama. With the expansion of its Toquepala mine finished and an updated environmental impact study for its Tia Maria project expected to be approved by this summer, Peru hopes to claim a piece of the Chinese market.

China, China everywhere

However, it is important to note that two other significant Peruvian projects are actually owned by Chinese companies. China’s state-backed miner Chinalco owns the US$3.5-billion Toromocho copper mine in Peru, which started producing copper in December. Also, Reuters reported on April 13 that a consortium of Chinese companies led by the Hong-Kong arm of China Minmetals purchased Glencore Xstrata’s (LSE:GLEN) Peruvian Las Bambas copper mine for just under $6 billion.

It is somewhat telling, then, that an executive at Minmetals Non-Ferrous Metals said that China could become a net exporter of refined copper within the next two years. Reuters states that although the country will still have to import copper concentrate, Vice President Xiaoguang Jin told reporters that China can now cover its own domestic copper demand, and may sell copper abroad in the future. Even though International Business Times suggested on April 15 that China is “going global” to meet its copper needs, the fact that it now owns two of the largest projects in Peru indicates China’s prevalence in the copper market.

Together forever?

Like any industrial nation, China needs copper for pipes, wire and other components for industry and building construction. Further, it has an ambition for growth that is greater than that any other country. And, as Boston University political economy expert Kevin Gallagher told International Business Times,“[t]here will be significant demand for copper in China for the next 20 years.”

However, there is more at play in China than just expected industrial demand. Reuters has explored the practice of using copper as collateral in Chinese financing deals, specifically citing the effect of a significant copper sell off following China’s first corporate bond default in March. The practice of using copper — as well as other metals, including gold — for financing deals is unregulated by the Chinese government. China may eventually try to put a stop to the deals completely, prompting fears of an increased glut in the already oversupplied copper market. As Goldman Sachs analyst Max Layton told Reuters, “[i]t’s not in the government’s control and it has a big impact on money supply growth. That’s one reason why it’s unlikely the government is going to allow it to continue indefinitely.”

Even so, Reuters also notes that canceling too many deals too rapidly would also hurt China, meaning that the country will stay at least somewhat tied to the red metal for now. As copper prices dropped to $3.0405 a pound on Tuesday and rose to $3.086 a pound Thursday, with both changes tied to news on the Chinese economy, this week continued the longtime trend of China’s almost axiomatic relationship to copper.

 

Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned.

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