Copper Bulls Upbeat at China Meet Even as Property Risk Eyed
The metal often viewed as a barometer of the world economy is heading for its best year since 2010.
(Bloomberg) -- Just two years ago copper was floundering at the lowest level since the global financial crisis. Now the metal often viewed as a barometer of the world economy is heading for its best year since 2010 on bets that miners can’t dig fast enough to keep up with strengthening demand.
The metal’s 24 percent rally since the start of January lends a bullish backdrop to Asia Copper Week, an annual cluster of events starting in Shanghai on Tuesday. When traders, producers and consumers gathered in China’s main commodity hub in 2015, a slowdown in the nation’s industrial economy was beating prices of copper and other metals down to the lowest level since 2009. An upturn last year was given fresh impetus by the election of Donald Trump as U.S. President and evidence that a global economic recovery was under way.
Now the market is more confident about prospects for prices in the long run, says Adam Fan, chief executive officer of consultancy Shanghai Metal Market.
“Sentiment at this event will be completely different from the past two years,” Fan said in a phone interview last week. “The overall mood is relatively bullish. From a global perspective, slowing investment in copper mines will lead to tight concentrate supply over the next two years. And in China, we don’t see any clear bearish trend for downstream demand in our model.”
Other observers have flagged shorter-term risks, led by a nascent property slowdown in China. But with average annual prices heading for the first increase since 2011, banks from Citigroup Inc. to Bank of China see more gains this decade as world growth powers on. Oscar Landerretche, chairman of top global miner Codelco, who is scheduled to address the conference, recently dropped his caution to say that a return to $10,000 a metric ton is possible.
Supply in Spotlight
Top of the business agenda in Shanghai are talks in which miners including Chile’s Antofagasta Plc and Phoenix-based Freeport McMoRan Inc. will agree how much they will charge Chinese smelters for raw material supplies next year. Miners are seeking lower treatment and refining fees given the prospect of tightening mine supply, together with growing demand from a Chinese copper industry that has added millions of tons of new capacity this decade.
Weaker supply growth or a contraction is at the heart of copper’s long-term bull case, with more frequent disruptions and a dearth of new mines combining to slow output. The refined copper market will be nearly balanced next year, before slumping into a deepening deficit from 2019 that will underpin prices past the turn of the decade, according to Bloomberg Intelligence. The global shortage will be almost 400,000 tons by 2022, it estimates.
“Copper mine supply will continue to see some challenges due to a combination of potential labor strikes, community difficulties and declining ore grades,” Fu Xiao, head of commodities strategy at BOCI Global Commodities UK Ltd., said in an interview by Wechat last week. And the next few months are “big” for the copper market given the possibility of fresh disruption amid wage talks at major mines, according to Goldman Sachs Group Inc. analysts.
Electric Metal
No metals conference is complete these days without discussion of the world’s electric vehicle revolution -- another pillar of the bulls’ long-term view. Annual electric vehicle sales of 50 million units could lift copper demand by 5.5 million tons a year, equal to about 24 percent of entire demand at present, according to Sanford C. Bernstein’s base case published last month.
“Promotion of new energy vehicles may not be an immediate boost, but will be at least bullish for the long-term demand outlook,” SMM’s Fan said. In Shanghai, officials from the International Copper Association and consultancy Wood Mackenzie Ltd. will offer their latest outlook for copper’s use in electric vehicles and in the wider renewable energy sector.
Demand Doubts
For skeptics, the most obvious reason for immediate caution is a slowdown in two areas that are critical for demand: China’s property market and its electricity grid. Home sales fell the most in almost three years in October, while floor space under construction is in the red on-year. JPMorgan Chase & Co. sees a 6 percent decline in home sales in 2018. Investment in power grid infrastructure was flat at about 413 billion yuan in the first 10 months from a year earlier, compared with a 29 percent gain in the same period in 2016, according to the China National Energy Administration.
“The property market in China will definitely be weaker as government curbs take effect, while power grid spending will shrink as there’s not many new projects on which to spend,” Chris Wu, analyst at researcher CRU Group, said from Beijing. “Overall market sentiment is bullish right now, but on a seasonal basis the market is weakening so that won’t let copper prices shine just yet.”
Copper in London fell for a second day on Tuesday, declining 1.3 percent to $6,853 a ton by 8:54 a.m. local time.
Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."
To contact Bloomberg News staff for this story: Martin Ritchie in Shanghai at mritchie14@bloomberg.net, Winnie Zhu in Shanghai at wzhu4@bloomberg.net.
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, James Poole
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With assistance from Martin Ritchie, Winnie Zhu