China Concerns: What to Expect of the Global Copper Price in 2014?
In the last 12 months, the international copper price showed a neutral movement (moving more or less sideways). This is particularly due to a number of issues in China, the world’s second largest economy, which impact negatively on the copper price movement. China has become such an important market for a variety of commodities, including copper (used in construction and electronics), that other countries can be considered almost irrelevant. Why do analysts have low expectations of the copper market for the remainder of 2014?
Due to expansion of its construction sector in recent years and the country’s increasing output of electronics - coupled with the fact that it has an enormous population - China has become the world’s largest importer of copper. However, the recent economic slowdown in this economy, evidenced by GDP growth figures declining from the +10 percent range (year-on-year) to 7.5 percent have placed downward pressures on the price of copper (amid the country’s lower copper demand). China’s property market too has cooled considerably after a period of extensive growth and price increases. China’s construction sector is not expected to improve markedly in the near future and therefore the copper price has difficulty climbing.
Another factor jeopardized the performance of the copper price at the start of May 2014, when it became known that Chinese companies and Chinese financial institutions made advantage of specific rules on China’s capital market. These companies have been borrowing money outside China in order to benefit from lower interest rates. To obtain these loans, the companies used certain metals (such as copper or gold) as collateral. This is in fact allowed according to Chinese law. However, these rules were actually intended for those Chinese companies that needed financing for purchases of commodities. Moreover, fraudulent acts have been committed as it became known that various companies use the same batch of metals as collateral to obtain multiple loans. The government of China now intends to change these rules. However, this then placed downward pressure on the global copper price as Chinese companies have large quantities of copper stored (for collateral purposes). A change of financing rules in China will result in a situation in which copper is less easily used as collateral to obtain loans and therefore part of China’s large copper stockpiles are expected to be sold, thus placing more downward pressure on the copper price.
In the last two weeks the copper price somewhat recovered. However, due to limited construction activity in China in combination with increased copper supply in China inflicted by the changing legal framework, the copper price is most likely to move sideways in the remainder of 2014. These two matters are no surprise to the international copper market and therefore a sharp decline in copper price is not expected to occur (as it did at the start of June amid China concerns).
Indonesia is an important player in the global copper market. The Grasberg Mine, located in Indonesia’s eastern province of Papua, is the third-largest copper mine in the world. This mine is exploited by Freeport Indonesia. Together with Newmont Nusa Tenggara, Freeport Indonesia accounts for about 97 percent of Indonesia’s total copper production.
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