Back in December 2008, SHSS suggested that world refined consumption probably fell by between 10-20% so creating a surplus of 740kt to 1,180kt in that quarter alone, using its definition of consumption being material going into furnaces. Current global consumption is no better, either in China or elsewhere in the world. Thus, a monthly surplus of between 250kt to 400kt is being built up in January.
In China, scrap merchants lost so much money in the second half of last year that many are idle; scrap is, therefore, tight in China. Some smelters have also been forced to cut production, led by Jiangxi Copper, who have had a blow-out in their oxygen plant, so we hear, which will take 6-7 months for reparations to be completed. Until 2009, importers had difficulties in opening Letters of Credit; now banks are enabling LCs to be given and opened.
The combination of these developments together with the usual market games being played has given the appearance of tight supplies in China, despite domestic consumption remaining very weak. Now, the arbitrage between SHFE and LME has become profitable for importers, we should expect that cathode imports into China will become significantly higher in coming months.
Moreover, we understand that the SRB is buying 20-25kt a month directly from producers/merchants, basis monthly average prices. Clearly, large imports will be greater than will be needed for furnaces, but, then, such a development will be nothing new for the market.
Consumption in China remains weak. A modest improvement is being seen in power cable. Magnet wire remains weak, though some makers see signs of recovery caused by government providing incentives for the rural community to acquire refrigerators, TVs, washing machines and mobile phones. Inputs into the real estate sector also remain weak - some improvement should be seen later in the year. However, anything to do with exports is a disaster; copper exported in all its forms accounts for around 30% of China's copper consumption and between 60-70% of its GDP, once the feedback loops of investment, employment, consumption etc. are allowed for.
Our friends see China's wire and cable consumption being worse in 2009 than last year; brass mills are unlikely to experience a better result.
Global appliance manufacturers have very weak businesses made worse by the Chinese starting to dump surplus inventories outside China. With economic activity being so weak and unemployment rising sharply in both the USA and the EU retaliatory action risks being taken since there will shortly be a new Administration taking office in the USA and a new Commission in Brussels.
The collapse in exports and manufacturing reported by so many Asian countries for November 2008 confirms what we hear on the ground. Semi-fabricators have difficulty in planning because their customers have no visibility. Uncertainty and volatility in prices and currencies only add to the difficulties being encountered by manufacturers and semi-fabricators in Asia and elsewhere. In some Asian countries, especially those where a change of government is likely or where there is political instability, there is a sharp drop in domestic business, such as in Malaysia, Thailand. Others are very weak, such as S Korea and Taiwan but for other reasons.
What is emerging out of this credit crisis and global recession is a long period of weak global business activity as the world deleverages and consumers become savers, despite central banks and governments trying to persuade households to spend. In the long run, the collective wisdom of households is infinitely superior to that of central banks and governments. Households have learnt their lesson.
What does this background mean for copper prices? Prices should continue falling, but markets seldom move in straight lines. Despite the cuts in production - with more to come - large surpluses will emerge this year as global consumption will fall by at least 2%.
Nonetheless, the direction of prices until mid-2009 is likely to be up for hope springs eternal. We could see prices reaching $5,000 by then which would provide an excellent opportunity for producers to hedge and for others to short. By end 2010 or in 2011, prices should be below $2,000.Simon Hunt was one of the founders, in 1975, of top metals analysis consultancy Brook Hunt, which still bears his name. He left at end-2005 to start up Simon Hunt Strategic Services which specialises in copper, global economics and China. For further information please contact Simon Hunt at Simon Hunt Strategic Services on 0207 859111 or firstname.lastname@example.org