Barclays | China trip notes: Copper conditions soften
28 March 2012 2
CHINESE COPPER MARKET UPDATE
Chinese copper market dynamics
Chinese copper smelters, fabricators and end-use product manufacturers entered 2012expecting another year of double-digit growth. What they have encountered is weaker, butstill a level of growth most countries would be envious of.The combination of industrial manufacturers operating in anticipation of strong growth onthe one hand and a government targeting slower more sustainable growth on the other hasresulted in a short-term dislocation between supply and demand in the Chinese coppermarket. It will take a little time for balance to be restored and inventory, both cathode andproduct, to be consumed. This looks most likely to begin later in Q2 once economic growthimproves from the current trough.
Softer-than-expected orders are partly a function of excess capacity
It is clear that the Chinese industrial sector is suffering from overcapacity and this factorshould be borne in mind when digesting producer reports of weaker orders. As capacity hasgrown ahead of demand, market share at the company level is being lost. We believe that,over time, the Chinese market will consolidate its disjointed manufacturing industries. Butsuch a process will take time, be painful in parts and involve periods of disequilibrium.
Chinese copper fabricator sentiment is negative
Sentiment towards the short-term outlook for copper demand amongst China’s fabricatorsis negative. In our discussions with pipe and tube manufacturers, wire and cablemanufacturers, sheet and plate manufacturers and upstream at smelters, the feedback wasunanimous; that orders had been weaker than expected, in some cases lower y/y and theimprovement in buying after the Chinese new year holiday had been slow. Sentimentamongst pipe and tube manufacturers, who primarily service the air-conditioner market,was particularly weak. White goods demand (which accounts for 24% of Chinese copperconsumption) in general was described as soft due to a combination of slower constructionactivity, weaker export demand and an end to the stimulus package for white goods sales.That said, export demand, particularly to the US was reported to have noticeably improvedin recent weeks and was expected to continue improving in Q2.
Figure 1: China’s copper demand by end-use Figure 2: Chinese bonded copper stocks have risen rapidly
China's copper demand by end-use
0100200300400500600700Dec-10Mar-11Jun-11Sep-11Dec-11Mar-12Chinese copper bonded warehouse stocks (Kt)
Source: Brook Hunt, Barclays Research Source: CRU, Barclays Research