Bloomberg
reported today that Simon Hunt Strategic Services, a well-known
metals and mining research company, has forecast that consumption
of copper in China will decline in 2012 for the first time since
the financial crisis of 2008.
According to
Reuters
, China consumes about 40% of the world's refined copper. Prices
have been weak for much of 2012 but have started to turn higher
over the past couple of weeks following the Federal Reserve's
decision to implement further quantitative easing (QE3) and in
anticipation of further stimulus from Chinese authorities.
Copper prices are considered to be highly sensitive to and
very predictive of economic activity. Some economists refer to
the metal as "Dr. Copper" for the ability to use changes in the
trend of copper prices to forecast turns in the economy.
Following a two-week trip to China, Hunt estimates that copper
consumption will fall by 8.5% to 5.6 million metric tons during
2012. But Hunt does anticipate a rebound to 5.9 million tons in
2013, an increase of 5.6%. Bloomberg states, "'The safety valve
of exports has gone, the domestic economy is slowing down, they
have a problem of surplus capacity and cash is extraordinarily
tight,' said Hunt, who estimated total copper reserves in China
at 3.5 million tons, including reported and unreported
stockpiles. 'There are no signals of a recovery in heavy industry
and manufacturing.'"
Deliverable copper stockpiles reported by the Shanghai Futures
Exchange stand at 162.547 metric tons as of September 27, 2012,
down from 227,276 metric tons on March 15, 2012 but up about 66%
from a year ago. "There's a huge amount of inventories of all
types," Hunt told Bloomberg, "You walk round and trip over drums
of cables."
In a related story,
Reuters
reported that China's Ministry of Transportation has cut its
railroad construction budget for 2011-2015 by 18% to 2.3 trillion
yuan ($366 billion). The investment slowdown has more to do with
the aftermath of a major accident involving a high-speed train
last year than it does with the current economic slowdown but
railroad construction consumes a lot of copper, which could have
an impact on overall demand.
Copper miners and smelters could be affected if Hunt's
analysis is correct. U.S. listed copper companies include
Freeport Mac McMoRan Copper & Gold Inc. (NYSE:
FCX
), Southern Copper (NYSE:
SCCO
), Jiangxi Copper Company Ltd. (OTC:
JIXAY
) and Antofagasta PLC (OTC:
ANFGY
). Investors can trade the copper sector as a whole through the
First Trust ISE Global Copper Index Fund (Nasdaq:
CU
).
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