It used to be the case prior to the scorching 2008-09 recession that if the US sneezed, the rest of the world would catch a cold. What is now to be figured out is the precise impact a sneezing China could have on the broader world commodities market.
Hindustan Copper Chair-man Shakeel Ahmed says: “The impact of China sneezing, which is the case now, cannot but be profound on the whole range of commodities.” China happens to be the world’s largest producer and user of steel, aluminium and copper. To support production of these metals, China, notwithstanding it being a major producer of a big range of raw materials, remains a dominant importer of iron ore, alumina, coking coal, copper concentrate and scrap.
China, which made a habit of clocking an astoundingly high growth rate till it had reasons to slow down, along with other BRIC countries, came to be accepted as a bastion of growth even while economies in the West would fare badly. The immunity of BRIC (Brazil, Russia, India and China) countries, especially China and India, to what happens in the rest of the world is thought to be on account of their large domestic markets. But this has unravelled. “Take the case of copper, in which China alone accounts for about 40 per cent of world consumption. If discouraging trade and industrial production data emerge from China, then a negative price rally in the red metal is unavoidable. We are seeing a demonstration of that now,” says Ahmed.
More than anything else, what sent three-month forward copper prices to a four-month low is lower gross domestic product (GDP) growth forecasts for China on the back of reports that the country’s manufacturing operations were at their lowest last month since May 2009. The string of disappointing data released by the Chinese Nati-onal Bureau of Statistics shows April industrial production growth falling to 9.3 per cent from 11.9 per cent in March. The fact that fixed asset investments grew at their weakest rate in the first four months of 2012 at 20.2 per cent and state intervention to curb speculation in real estate slowed investment growth in new properties to 18.7 per cent in April, compared with 23.5 per cent in the first quarter, could only bearishly influence the copper market. Again, the very disappointing power output growth in China, it was only one per cent last month, brought bad omens for copper use.
For the bulls, their torment on red metal may not be over. Confirmation of this is embedded in a Deutsche Bank report which sees indicators suggesting “growth is slowing more meaningfully in China”. It further says, “Things look perhaps a little more worrying with respect to how much support that will give to the metals market.” As if the slowest quarter of growth in three years in the three-month period ended March was not enough, most watchers of the Chinese economy have come to believe there could be further deceleration in growth before a likely rebound in the second half of this year. Ahmed says it will be in order to take stock of what actually is happening with Chinese copper production and imports. A combination of weak domestic demand resulting from subdued manufacturing activities and high metal stocks led to a 3.7 per cent fall in the country’s refined copper production in April to 491,000 tonnes, a monthly slide for the first time since January. For the same set of reasons, Chinese import of anode, refined metal, alloy and semi-finished copper was down nearly 19 per cent to 375,258 tonnes last month, an eight-month low. This happened in the wake of March imports declining 4.6 per cent to 462,182 tonnes. The over-supply situation is prompting Chinese importers to resell partial term delivery of copper to original suppliers abroad and also reschedule arrivals of contracted material. Bears, in the meantime, have drawn inspiration from a rapid fall in the LME premium for cash copper over the three-month delivery rates, signalling easing of supply tightness. The slide in copper prices is despite the earlier forecast that this year would see supply deficit of 237,000 tonnes.
“Europe as such is not a big mover of the global copper market. But the growing risk of a chaotic Greece, whose debt will be 161 per cent of GDP next year, exiting the euro and doubts about the euro zone being ready with a strategy to save the single currency are a big destabilising factor for the market, commodities as well as equity,” says Ahmed.
Compounding the crisis, the story of JPMorgan’s failed hedging strategy causing a trading loss of $2 billion has rattled risk asset markets. Indian anaemic industrial production data was also a destabilising factor for copper. Our industrial output growing 2.8 per cent in 2011-12, down from 8.2 per cent the year before, is a point of concern for metal traders. In this situation, salve in the form of a marginal fall in the US unemployment rate, rise in US consumer sentiment to a four-year high and China cutting bank’s cash reserve ratio to support growth isn’t enough to shore up copper prices.
