In its latest quarterly Commodities Review, investment bank Société Générale argues that a bumpy, but safe, landing is likely for the Chinese economy, but that we may not know until late 2013 whether a hard landing has been avoided. The bank doubts, therefore, that investors will be unwilling to run large long positions, in the second half of this year, in commodities with high exposure to the Chinese economy. Among these, of course, number the base metals, of which China accounts for almost 40% of global consumption; SocGen is averse to copper in particular, taking a long-term bearish view on prices, while being rather more neutral on the other major base metals. The exception is tin, for which SocGen is looking for a larger fall between now and 2016 than it is for copper).
This is borne out by events to date. SocGen notes that, among the metal-intensive sectors, China's May auto production was down 4.9% year-on-year - and 12% on a monthly basis while the production in the first five months of the year was up by just 4.9% year-on-year. Furthermore, railway investment plans have undergone an upheaval since the change of Railways Minister in February and the bank understands that at least $100Bn Yuan [$15Bn, or 14%] from the high-speed railway build-out this year. These and other developments, especially increased primary and secondary domestic supply, point to a further sluggishness in Chinese copper imports. These were down substantially in the first five months of the year (partly also as a result of an unfavourable Shanghai-LME spread) and the bank also notes that the amount of copper in bonded warehouses in China is reported at anywhere between 500,000 tonnes and one million tonnes. The arbitrage may also account, at least in part, for the recent increases in copper tonnage in LME warehouses. Although SocGen is looking for some month-on-month improvements in Chinese copper imports in the second half of the year, the growth figures for the full year are likely to be disappointing.
SocGen believes that copper demand elsewhere in the world, which was clearly affected in Q2 by the ripple effect of the disruption in Japan following the tragic events of March, will bounce back to a degree, but the bank remains concerned about patchy recoveries and is looking for global copper consumption growth of 4.4% this year, compared with 9% in 2010.
SocGen is looking for world copper mine production to grow by almost 5% in 2011 and over 7% in 2012, generating a likely surplus of concentrates in 2012 and the market for refined metal is expected to be in surplus in 2013, after a small deficit this year and a market more or less in balance in 2012.
The bank makes the point - indeed it says that "it must be emphasised" that constrained supply, rather than strong global demand growth, has been the key driver in the copper price dynamic over the past decade. SocGen points out, for example, that copper demand growth averaged only 2.2% per annum over the past decade, considerably below the rate for other base metals. The removal of this supply constraint is therefore expected to weaken the price-supportive matrix and SocGen avers that investors have been becoming increasingly aware of this.
There is significant growth in sight in the copper mining sector, a development that SocGen suggests may not always have been appreciated among market observers. SocGen is looking for African mine production to grow by 17% and Chinese growth to register 8% this year; further forward, there is a sharp increase scheduled for next year and, even allowing for potential disruptions, mine supply in 2012 may well exceed 18.5M tonnes. With the concentrate market easing, 2012 may well see significantly improved Treatment and Refining Charges for smelters and refiners.
This, allied to "mounting market fears of a US double dip", along with the continued increase in copper mining output, leads to a near-term aversion to copper. SocGen doubts that prices can make new highs in the current economic cycle and is now discounting the possibility of a copper ETF, and indeed does "not expect any large physical ETF in the short or medium term".
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