Commodities | Aug 28 2006
By Greg Peel
Merrill Lynch reports apparent copper consumption in China for the first seven months of 2006 has fallen 10% year-on-year. This was mostly due to falling imports, down 44% over the same period and down 10% from June to July. Furthermore, local production has increased by 21% over the period and exports of Chinese copper are up 388%.
While these numbers look daunting, Merrill’s analysts suggest the picture is not particularly clear. Their forecasts suggest 9.3% increase in copper consumption for 2006, but with China contributing 36% of world consumption growth, a fall in demand could see the forecasts shift rapidly from supply deficit to surplus.
However, over the two months of June-July, Chinese production of copper semis was up 7%, notes Merrills, suggesting demand is actually still strong. There is probably destocking going on but this is hard to measure.
On the flipside, there remains a threat to 22% of world production in the next five months due to strikes in North and South America, and this is a significant amount.
Merrills analysts are maintaining the view that copper prices will remain high, but have become wary, and are keeping a watchful eye on weakening demand from US construction.
In the meantime, signs of the long expected surge in alumina and aluminium production in China have emerged. Alumina production was up 48% for the first seven months, which was responsible for sending the spot alumina price from a high of US$700/t in March to US$425/t now. Aluminium consumption has surged 31%, but production is up 18%. Exports, however, have fallen 17%.
On a technical basis, Barclays Capital analysts have noted a similarity between the chart top now, and the chart top in the 1980s. If history repeats, the market will remain in a choppy sideways mode until turning bearish into 2007.
The steel market continues to show weakness. Many observers have anticipated some final weakness before the market turns strong once more, but views are becoming more wobbly.
Merrill Lynch, a supporter of this view, notes Chinese prices appear to have bottomed out, Europe is emerging from its summer shutdown and Japan is about to hit its seasonally strongest demand period. However, the US provides uncertainty.
Troubled US car manufacturing icon, Ford, has announced big production cuts. Merrills notes that when General Motors took the same action in early 2005, a price spiral was triggered. US inventories are now at their highest levels for a year, which implies downward pressure on prices. The analysts suggest uncertainty remains in a fractured world steel market which is seeing prices in different regions moving in different directions.
Credit Suisse has made an interesting observation on steel production/consumption on a macro basis.
Measuring steel price intensity (or kilograms of steel produced in the world per capita per annum), CS notes that the Japanese emergence as an industrial superpower had the effect of increasing intensity significantly from 1950 to the late 60s, before the chart plateaus and begins to fall. The drift-back continues all the way to 1995, suggesting that the world slowed its steel production despite continuously increasing its population.
1995 marks the emergence of China, and if China can be equated to Japan (don’t forget China has an immensely greater population) then we should be in for at least another five years of similar uptrend. The graph is sloping up with the same gradient as the Japanese period.
This implies production will increase, but only because demand requires it. It’s thus hard to see a major collapse in steel prices for some time, although the usual roller-coasters will still be active.