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Slowing growth in China's economy has given pause to some in the copper industry, but it doesn't herald an end to the long bull market for the metal, executives and analysts said.
Traders across many commodities markets were rattled in March, when Beijing lowered it's largely symbolic economic growth target to 7.5%, from the 8% rate held in recent years. China's rapid economic expansion during the last decade dramatically increased its demand for copper, a metal widely used in power cables, plumbing, and other building blocks of industrialization. The country now accounts for about 40% of world consumption.
China's rise, along with the struggles mining companies faced in ramping up production to meet rising global demand, pushed benchmark copper prices on the London Metal Exchange to a series of record highs, most recently above $10,000 a ton in February 2011. But prices sank late last year as sentiment toward China soured Europe's debt crisis deepened. Copper on Wednesday traded at about $8,000 a ton.
Whether China's lowered growth target, along with signs of weak copper demand there during the first three months of the year, means a lasting shift for the world copper market has been a subject of debate at the CESCO week copper industry conference, hosted by the Chilean Center for Copper and Mining Studies, and commodities research firm CRU.
"You don't need to have outrageous gross-domestic product growth" to underpin high Chinese demand for copper and other commodities, said Robert Lind, chief economist with London-listed miner Anglo American Plc (AAL.LN, AAUKY), in an interview.
Beijing's resolve to focus on stoking demand within the country, combined with the copper-intensive construction projects going on as China's development shifts to more rural western areas, should also help keep copper consumption there from slumping, said Michael Lion, chairman of Sims Metal Management Asia Ltd., a unit of Sims Metal Management (SMS, SGM.AU). Sims is the world's largest publicly traded metals recycler.
"There's no question that the refocusing to domestic demand" has already helped cushion the blow from reduced exports to Europe as countries there deal with the euro-zone debt crisis, Lion said in an interview. "We already see it in the metals industry."
The Chinese government, Lion said, "is extremely conscious of the social divide" between its richest and poorest citizens. "One thing they can easily do to narrow that gap, one thing they are doing, is supplying electricity. That uses an awful lot of copper."
And even if China's growth does disappoint this year, the structural supply shortage expected in the copper market should keep prices well above the cost of getting the metal out of the ground, said Vanessa Davidson, copper group manager for CRU.
Davidson said that every percentage point change in the growth of Chinese copper consumption would represent a swing of roughly 100,000 metric tons of refined copper. CRU expects a supply in the global refined copper market to fall short of demand by 500,000 tons in 2012, meaning China would have to undergo a severe slowdown to eliminate the supply shortfall on its own.
Still, some economists say that China's rapid growth sets its economy up for just such a reversal, one that could prove similar to the busts after other fast-growing economies in Asia overheated. That's too simplistic, Anglo's Lind said.
China's economic planners "aren't complacent," he said. "China's development model can't sustain this pace indefinitely. They know the model needs to change."
Lind said the unprecedented pace of industrialization in China and the country's massive population made him skeptical of comparisons to the shocks felt in the Japan and South Korea in the 1990s.
"There's no need to argue that China is going to experience that kind of implosion," he said.
-By Matt Day, Dow Jones Newswires; 212-416-4986, [email protected]