The China Factor and What It Means for the Copper Price

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"Prices should continue falling, but markets seldom move in straight lines."

Back in December 2008, SHSS suggested that world refined consumption probably fell 10% to 20%, creating a surplus of 740kt to 1,180kt in that quarter alone. Current global consumption is no better in China or elsewhere in the world. Thus, a monthly surplus of between 250kt to 400kt is being built up in January.

In China, scrap merchants lost so much money in the second half of last year that many are idle; scrap is, therefore, tight in China. Some smelters have also been forced to cut production. Until 2009, importers had difficulties opening Letters of Credit; now banks are enabling LCs to be given and opened.

The combination of these developments and the usual market games has given the appearance of tight supplies in China, despite domestic consumption remaining very weak. Anything to do with exports is a disaster; copper exported in all its forms accounts for around 30% of China's copper consumption and 60% to 70% of its GDP, once the feedback loops of investment, employment, consumption, etc. are allowed for.

The collapse in exports and manufacturing reported by so many Asian countries for November 2008 confirms what we hear on the ground. Semi-fabricators have difficulty planning because their customers have no visibility. Uncertainty and volatility in prices and currencies only add to the difficulties being encountered by manufacturers and semi-fabricators in Asia and elsewhere. In some Asian countries, such as Malaysia and Thailand (where a change of government is likely or where there is political instability), there is a sharp drop in domestic business.

What is emerging out of this credit crisis and global recession is a long period of weak global business activity as the world deleverages and consumers become saversódespite central banks and governments trying to persuade households to spend.

What does this background mean for copper prices? Prices should continue falling, but markets seldom move in straight lines. Despite the cuts in productionówith more to comeólarge surpluses will emerge this year as global consumption will fall by at least 2%.

Nonetheless, the direction of prices until mid-2009 is likely to be up for hope springs eternal. We could see prices reaching $5,000 by then, which would provide an excellent opportunity for producers to hedge and for others to short. By end 2010 or 2011, prices should be below $2,000.

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