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China's demand bends copper's value

In the English-speaking world, it was once popular to suggest the irrelevance of an idea by asking rhetorically, "But what's that got to do with the price of tea in China?" Today, however, everything in the global economy seems one way or another tied into the price of copper in China. The metal has acquired a higher profile than usual as an indicator of international economic health.

Bloomberg News reports the Copper Development Association's credible claim that 400 pounds of copper is used in constructing a house and 50 pounds in constructing an automobile. According to Reuters, nearly half of all US copper consumption is traceable to building construction. Copper is thus considered a leading indicator of not just US but global industrial activity, perhaps the most important of the (nonferrous) base metals, which also include zinc, tin, lead, nickel and aluminum.

The metal is used extensively in electrical applications, pipes, roofing, shipbuilding, and many household products, especially in numerous copper alloys of which the most familiar are bronze and brass.

Thus Chinese demand for copper has been much in the news over the past year (see Chinese doubts weigh on commodities, 2 October 2008), not least due to the publicity this year around the US$19.5 billion plan for Aluminum Corporation of China (the state-owned aluminum firm better known as Chinalco) to increase its stake in the Australian mining giant Rio Tinto.

This maneuver collapsed in June when Rio Tinto reached an arrangement with the iron-ore operations arm of BHP Billiton. The Australian government was particularly happy at this, as the Chinalco move had been seen domestically as a threat to the country's economic sovereignty.

Citibank affirms that Chinese buying was the driving force behind the price rally in copper and other base metals in recent years up until the outbreak of the current global economic crisis. Prices fell late last year and early this year, as Chinese industry ramped down production and consumed existing supply stocks; copper then led the rebound in base metal prices in the second half of the current year's first quarter, as Chinese buying in February and March set off a price recovery.

Yet a longer-term driver of world prices will be India's consumption of the metal, according to a spokesman for Indian metals company Hindalco, which claims to have 40% of the domestic copper market, where it competes with Sterlite Industries, the country's biggest copper producer.

This is probably true in general, but the strength of that driver will depend on the newly elected government's success in expanding of demand in the power sector (building new stations makes for strong copper demand). This requires them, however, to make good on long-standing promises to bring electricity to regions lacking it, especially in the countryside.

However, such attempts at electricity industry reform have for years run up against bureaucratic resistance in the various states against unbundling different services. Such unbundling would mean marketizing the economy in even such fundamental activities as power generation and distribution. The difficulties faced by such unbundling policies in the European Union suggest the order of the obstacles to be confronted.

Turkey, however, appears to be surmounting its problems in this connection that had been evident earlier in the decade (see Delhi's options beyond Iran, 28 March 2006), so Indian experts would do well to look at how the policy process was sequenced there, even though the problems of coordination and cooperation between the center and the regions are greater in India.

The strong fluctuations in the price of copper are evident in its recovery from a historic low near US$0.60 per pound in mid-1999 to nearly to $4/lb in May 2006 before falling to $2.60/lb in early 2007. It subsequently rose again, and from mid-2007 through October 2008 it fluctuated at times wildly between $3 and $4/lb, reaching a high of over $4/lb in mid-2008 before plummeting to close to $1.25/lb towards the end of that year.

Since the reversal of prices in mid-2008, copper has been the worst performer among the base metals, due largely to lower Chinese demand. Uncertainties in the US auto industries also depressed the price.

Copper prices have since recovered in fits and starts to $2.45/lb most recently, although with such near-term volatility that two weeks ago this was as low as $2.15/lb. As prices have lately risen again, there is controversy over how much of the rise is due to genuine economic production and how much is due simply to restocking the depleted stores of the metals.

To be sure, the US and European housing and automobile industries have provided no demand to support the increased prices. Consensus expert opinion therefore seems now to be trending towards the latter of the two views mentioned, suggesting that China has not only restocked inventories but has also sought to establish a "strategic reserve" in the metal.

It is likely that copper prices are now near their high for the year, although a finishing blow-off peak is not ruled out, depending on specialist manipulation of popular market sentiment and the degree of mania the extrinsic events feed into non-expert investment decisions.

It is more likely, however, that any such sentiments will be reflected in the prices of precious metals rather than base metals.

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This page contains a single entry from the blog posted on July 24, 2009 3:53 AM.

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