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Message: How China Is Shaping Copper Markets
Electric cars, renewable energy will drive demand in the decade ahead, says report.
When searching the global markets battlefield for potential casualties of the United States trade war with China, two of the more obvious are the renminbi (RMB) and copper. Indeed, their twin fortunes have been intimately intertwined since the summer when sabre rattling was matched with action.
There are a number of reasons for this closer-than-usual relationship. The corollary of a weak RMB is a strong dollar and dollar strength and commodity price weakness often go hand in hand. The second is China's crucial role in the world economy. In 2016, China accounted for 40 percent of the entirety of global growth, according to the World Economic Forum. Similarly, a one percent decline in global trade has historically led to four percent decline in copper prices.
Growth Tied to China
Both copper and China are bellwethers for the global economy and the ratcheting up of tariffs and rhetoric is unnerving investors. The September Bank of America Merrill Lynch Fund Manager Survey revealed that 24 percent of investors expect global growth to slow in the next year, up from net 7 percent in August. The surveyed investors are gloomier about the prospects for the global economy than at any time since December 2011.
As well as indirect links through trade, there is a direct relationship between the red metal and the People's Republic: China consumes 40 percent of global copper supply. China's economy is showing signs of slowing. The Caixin China General Manufacturing PMI fell to a 14-month low of 50.6 in August. GDP growth slowed slightly to 6.5 percent in the third quarter.
Copper demand appears to be robust. Chinese copper inventories have declined to levels last seen in 2017 when prices were over $7,000/ metric ton, in spite of refined copper imports hitting a series of seasonally adjusted record highs. This suggests those imports are being consumed.
China's shift to clean energy is not just a policy goal, it is an environmental and health necessity. According to one 2015 study published by climate research organization Berkeley Earth, 1.6 million Chinese die each year as a result of air pollution. The electricity sector globally accounts for 65 percent of all copper demand, photovoltaic cells depend on copper and a typical wind turbine uses one metric ton of the metal.
Beyond electricity generation and transmission and renewable energy, the next biggest uses of copper are in construction and transport. An average electric car uses six kilometers of copper wire in the batteries and rotors of their engines. Demand for copper from manufacturers of electric is forecast to increase nine-fold by 2027, according to consultancy firm IDTechEx in a report published this year.
Against this backdrop, Citigroup analysts issued a report in July entitled "Prepare for a decade of Dr. Copper on steroids." Chinese copper demand and global trade are undoubtedly important for copper prices. But the rapid adoption of renewables and electric cars are long-term secular trends that may ultimately prove more important drivers than tariffs and trade wars.
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