May 2011 - Recently, Goldman Sachs ruffled feathers by advising its investors to sell stakes in crude oil, cotton, copper, soybeans and platinum. Despite lagging prices and faltering demand, Goldman predicts demand for these commodities will outrun supply in the long term. According to London, U.K.-based precious metals consultancy GFMS Ltd.'s Copper Survey 2011, since 2009, copper prices have, for the most part, managed to maintain an upward trend. Particularly influenced by Chinese demand and "anaemic growth in primary copper production," the market was pushed into a gross deficit in the third quarter of 2009 for the first time following two years of surpluses.
As China's demand for copper persists, the country will remain an influential force in the metals market. "We continue to see China as a key contributor to global consumption growth, which we believe will provide essential support to prices," says Nikos Kavalis, senior metals analyst at GFMS. China has driven Asian-refined copper production during the last 10 years. In 2010, this trend continued as output by the country increased 11 percent to 4.57 million metric tons. An upswing in Chinese mine production also aided the escalation.
In the copper mining sector, China is Asia's largest producer, contributing more than 7 percent to global production. China also has overtaken the United States as the second-largest producer of mined copper in the world, according to GFMS. Overall, GMFS estimates Asian output rose by 6 percent to 8.57 million metric tons in 2010, marking the third year of consecutive growth.
Mining disruptions, Japan
Recently, copper prices have declined due to inflation in China. Analysts predict this trend will reverse in the long-term. Mining disruptions in Asia and throughout the world are expected to continue. "Disruptions at the mine production stage, whether related to labor disputes or technical and operational factors, are likely to remain a feature of the copper industry and therefore limit output going forward," Kavalis says, noting such mining disputes are prevalent throughout the globe.
The disaster in Japan also has affected copper price and demand but to a lesser extent than might be expected. "The decline in industrial production will most likely negatively affect consumption in the country but eventually, the reconstruction will inevitably require additional copper usage," Kavalis adds. "Neither of the two are expected to have sufficient magnitude to affect global balances."
Demand in China is growing at a different rate, slower than during the last decade but still "healthy." Kavalis believes that given the much higher base, the tonnage contribution will be significant despite lower percentage rates. In 2010, China's industrial production grew more than 13 percent each month, topping 2009 by 11 percent. Chinese policymakers also implemented stricter measures in the second half of 2010 to fortify growth in bank lending, industrial production and fixed asset investment.
China also is working toward reducing pollution and plans to reduce energy intensity by 16 percent by the end of 2015, down from the 20 percent China's 11th Five Year Plan estimated. China also plans to instill "new strategic industries," such as copper-intensive sectors, including energy-efficient vehicles and renewable energy generation and utilization, increasing copper consumption in transportation equipment and electrical and electronic product sectors.
As copper prices continue to fluctuate, some manufacturers are looking to alternative metals to meet their construction needs. "The higher the price difference between copper and aluminum, the bigger the incentive to substitute," Kavalis says. "Nevertheless, there are technical limitations to substitution and as such, we expect copper consumption growth will remain healthy in spite of substitution pressures." China's 12th Five Year Plan predicts 51.1 percent of the Chinese population will be urban dwellers by 2015, up from 47.5 percent in 2010. According to the report, the 36 million units of social housing that are planned may "offset the prospects of slowing growth in the private real estate sector in light of recent government efforts to quell a potential property market bubble." MM