China lag unsettles copper industry as Goldman sees rout

Mining executives talking up copper's long- term prospects at this week's industry gathering in Chile are unsettled by the level of Chinese buying in recent weeks. 

PHOTO: REUTERS

15 Apr7:05 AM

[SANTIAGO] Mining executives talking up copper's long- term prospects at this week's industry gathering in Chile are unsettled by the level of Chinese buying in recent weeks.

Traditionally, purchases accelerate after Lunar New Year celebrations. Not this year, according to Freeport McMoRan Senior Vice President Marketing & Sales Javier Targhetta and Aurubis Chief Executive Officer Bernd Drouven.

While Freeport, Aurubis and Santiago-based Antofagasta expect demand to pick up on new infrastructure projects and as buyers look to capitalise on lower prices, some of the bankers, traders and analysts at the World Copper Conference in Santiago this week aren't so sure. The metal's down 12 per cent in the past six months to below US$6,000 a metric ton, with Goldman Sachs Group predicting US$5,200 by the end of the year.

"You can't be bullish over the coming year," Goldman analyst Max Layton said in an interview at the conference Monday. "Prices are more likely to fall toward US$4,500 than to rise to the US$6,500 level. It's possible that copper demand in China has peaked, at least for some time."

China, which consumes almost half of the world's copper production each year, is grappling with a slowdown after an economic boom that sent prices up fivefold during the decade leading to 2010. The country's leaders are seeking to shift growth away from the property investment and factories and embrace services and domestic-led consumption.

Its influence on global industrial metals will diminish as market share declines, according to a Barclays report last month. The era of double-digit growth in Chinese consumption of metals is over, wrote analysts led by Kevin Norrish. The country accounts for almost 50 per cent of global metal consumption, data from the London-based bank show.

Slowing demand for the metal used in everything from electric wiring to plumbing sent prices for delivery in three months as low as US$5,339.50 a ton in London this year, compared with a record US$10,190 in 2011. The metal lost lost 0.5 per cent to US$5,961 a ton at 5:12 pm in London.

China will use about 2.6 per cent more copper than last year, the weakest growth since at least 2006, according to a report from Morgan Stanley last month.

While Chinese copper users have been slow to return to the market, smelters in the country are going back to normal with concentrate imports surging 74 per cent in March from February. Increased smelter output in China may further reduce shipments of refined metal.

A prolonged slowdown in Chinese demand for copper isn't necessarily a bad thing, Aurubis' Mr Drouven said. Hamburg-based Aurubis is Europe's biggest refined copper producer.

China's shift toward a consumer-driven economy and measures to curb corruption and environmental damage will result in more sustainable demand levels, with per capita consumption of the metal still well below North American and European levels and set to rise, he said.

"If we had a 10-12 per cent growth in copper demand in China it would be extremely unhealthy," Mr Drouven said. "We don't need excessive growth that we have seen for example in the steel market."

Diego Hernandez, CEO of Antofagasta, the world's ninth- largest producer, sees prices recovering toward the end of this year as mechanical faults, floods and strikes reduce mine output, narrowing any surplus to a quarter of what was previously estimated. Global demand probably will grow 3 per cent as China counters a slowing economy with investments in its power grid, he said in an interview.

Globally, output of refined copper will increase 3.4 per cent to 22.8 million tons in 2015, Morgan Stanley predicted. Demand may rise 2.4 per cent to 22.6 million tons, the bank said.

Freeport, which is expanding mines in Peru and the U.S. and may overtake Chile's Codelco as the world's biggest copper miner, sees the industry's aging mines continuing to struggle to keep up with even moderate global demand growth with the market set to move into deficit in 2017.

"There were over-expectations for the end of the Chinese New Year break," Freeport's Mr Targhetta said in an interview Monday in Santiago. "And maybe things have not been as bullish, or as blossoming, as some were hoping they would."

While copper consumption in China hasn't fallen, the market is still running down stockpiles of metal that were used as collateral for loans before the so-called Qingdao scandal broke, Mr Targhetta said. "I'm not pessimistic at all regarding China," he said. "China will be doing at least OK."

For now, tight credit conditions are hurting demand for the metal, according to Luvata Group, which makes fridges and air- conditioning units.

"Overall, it doesn't look so positive," Simon Collins, head of metals and minerals trading at Trafigura Beheer, said in an April 9 interview. "We see a slow comeback after the Chinese New Year."

BLOOMBERG