CAPE TOWN, South Africa — Global copper consumption is expected to grow 1.2% in 2012 to reach 20,349 million metric tons, with China accounting for the bulk of the demand. Within China, the health of the construction sector will be the main risk to copper demand, delegates to the 18th Investing in African Mining Indaba were told.
Standard Bank Group's Head of Commodities Research Walter de Wet, head of commodities research for Standard Bank group, told a forecast session that the demand for copper is unlikely to be strong enough to support prices above $9,000/mt for most of the year.
Copper is a base metal of choice for most investors and speculators and its price generally offers great insights into how traders view the global economic outlook, bank officials noted.
De Wet told delegates that China will still be the most important factor as far as global demand for copper in 2012 is concerned. He said China's demand, which has been growing on average by 15.1% per year since 2000, was expected to increase by 6.6% in 2012.
While China is the driver of global copper consumption, he expects the US and Europe to also be important centers of copper demand and in both cases they are expected to contract.
Noting sensitivities of copper demand to industrial production, De Wet said he expected the European need for refined copper to decline from 4,008K mt in 2011 to 3,827K mt in 2012. For the US, a decline in demand from 2,490K mt in 2011 to 2,440K mt this year is expected.
“We basically say forget Europe,” he said. “Not that Europe is not important, but in the bigger scheme of things when you break down the copper market and you look at where growth is coming from you should not be concerned about Europe.”
De Wet noted that LME and Shanghai inventories have been declining and Chinese refined metal imports have been strong recently. But Shanghai spot premiums have come under pressure in recent weeks indicating a lack of strong real demand. De Wet said the bank expects imports into China to slow in the next few months as physical demand remain lacklustre.
He said the bank has low supply side expectations, noting that mine supply has consistently fallen short of expectations since 2001. The lack of an adequate mine supply response will be a a key pillar of support for copper in 2012, he said, adding that the bank did not expect copper to cut into the cost curve in 2012.
"China should once again account for the majority of copper refined consumption growth in 2012. Understanding Chinese copper demand and potential weaknesses are crucial in understanding copper," he said.
De Wet noted that construction accounts for around 55% of China's total copper demand, other domestic consumption around 29% and exports adding about 16% to total demand. He said the impact of a Chinese slowdown in construction would be a decisive factor in demand, with domestic consumption needed to fill the gap.
"Although exports are perceived to be a risk to Chinese copper consumption, this sector constitutes only a modest percentage of total Chinese copper demand. We believe the real risk to copper demand remains within the construction sector," he said.
"After stabilizing over the second half of 2010 and into the first half of 2011, Chinese property sales growth started to deteriorate in September 2011. We expect sales growth to decline further during the first half of 2012. We note that most of the growth in construction has come from the private sector, with government related property development making up only a small percentage of total developments."
While some might worry that a drop-off of China’s exports could hurt Chinese copper consumption, De Wet said that the risk was not of great concern, because only 16% of China’s refined copper consumption went to exports.
De Wet also forecast growth from 25% of China’s copper consumption being used in domestically consumed products.. “If you look that retail sales continue to grow at 18% to 19% year-on-year, that is a good indication that domestically they are consuming despite tight monetary policy. We believe that copper demand for China will grow by 15% in this sector.”
De Wet forecast that the copper price would average $7,700/t during the year. “When you look at copper, probably more than many commodities, the supply side has been a big support for the prices and we do expect 2012 to be no different. And while we’re not super bullish on demand, although there is some mild growth, we believe the uncertainty in the supply side will continue to support the prices,” he said.
“Bottom line is we think supply will support the copper market, the uncertainty of that supply. We think demand is going to grow. We think we should not be too optimistic, especially during the first half of the year. There is a lot of pressure, not only the political uncertainty mainly in Europe but also monetary policy in China. We think copper will average $7,700 with good support when we go below $7,000 and we’ll probably see some destocking down, of course. But we do not think that copper above $9,000 a tonne will be sustainable for the most part for this year.”