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China copper demand in 2011 may be less than expected
Recently we published an analysis from copper and China specialist Simon Hunt suggesting that the copper price might rise at the beginning of 2011, but fall back heavily as the year progresses, before making a very sharp recovery in 2012, but crashing back down thereafter （see The likely pattern for copper prices in 2011 and beyond）. The latest projections for expansion by China's top copper consumer, which are well below analysts' expectations, may serve to support his short term view, given China's huge impact on the copper sector with demand levels far exceeding any Western recovery's ability to replace even a relatively slight fall below expectations.
A report by Scotia Capital's key strategy adviser on China, and reported by Bloomberg, notes that China State Grid Corporation - the country's largest electricity company and thus its largest copper consumer with around 13% of total copper consumption, is only planning an 11% increase in fixed asset investment in 2011. While this is still an enormous increase by world standards, it is heavily below analysts' forecasts which had been anticipating as much as a 45% increase, and much of the expectations for huge growth in Chinese copper demand leading to severe short and medium term supply shortfalls had been predicated on these kinds of figures.
While expansions of power supplies in China's rural areas may serve to counterbalance any shortfall in expectations of demand by China State Grid, these had also been built into analysts' expectations for the year ahead so the anticipated global copper supply shortfall may well prove to be less than expected - at least with respect to Chinese needs. With the likelihood of destocking by some major consumers and the release of copper from other speculative stockpiles likely to occur, Chinese imports may see a decline, while Western growth seen so far may well prove illusory as major copper consuming sectors, like new housing, are showing little or no signs of an upturn.
Another factor likely to come into play more and more is substitution for copper where this can be accomplished. This has already happened to a huge extent in plumbing and communications and aluminium's flat price progress and correspondingly increasing price advantage over copper makes it a more attractive substitute in some electrical areas. Substitution has been running at increasing levels in recent years and this could accelerate, particularly as the copper:aluminium price ratio is approaching 4:1 - an enormous difference and compares with a historic ratio of between 2 and 3:1 or less up until around the 2008 metals price crashes. This should be a major concern for copper miners and speculators.
While the International Copper Study Group predicts a 400,000 tonne shortfall in copper supply over demand this year, this could easily be heavily reduced by more substitution, destocking and lower demand than anticipated from the China power sector. And, further Chinese tightening putting a squeeze on demand can't be ruled out either as inflation there threatens to accelerate. Thus copper price progress through the year may not be such a slam-dunk as many speculators think.
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