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DEMAND FOR COPPER IN CHINA WILL MODERATE AS THE FISCAL STIMULUS IS WITHDRAWN FROM THE ECONOMY
Aram Gareginyan
ArmInfo
2010-11-03 13:59:00
Interview with Economist in charge of commodities at the IMF Research
department, Sean Roache
One cannot try to predict copper prices and stay local. Copper
concentrate is one of Armenia's essential exports. The largest consumer
of copper still remains China. However distant that country may seem,
it is proving again that the world is rapidly shrinking. How Chinese
Government thinks and acts, may affect the revenues of Armenian budget
- and the quality of life of teachers and pensioners nationwide.
What recent trends have been most important in the copper market?
What has been most important in the last 2 - 3 years has been the
demand from China. Without any doubt, that is the biggest influence on
copper. Around 40% if global copper demand is now generated by China
alone. Among the reasons for that is that China has been investing
very heavily in infrastructure - electricity buildings, networks, etc.
The marginal growth has really come from emerging economies in general,
and China in particular, and its infrastructure investment - in part,
or actually very largely driven by the government and fiscal stimulus
we've seen in China for the last two years. So that's the demand side.
What makes copper different from some other metals is real supply
side concerns. What we've been seeing in the last 2 - 3 years is the
reports coming from the largest copper mines in the world, that their
rates of production have been disappointing. In fact, productivity of a
lot of the largest copper mines s starting to get worse. All they are
digging out of the ground is not of as high quality as it was maybe 5
years ago. All this is leading to a tight supply - demand balance. And
that's leading to a big decline in copper stocks, and contributing
to the rise in prices that we've seen in the recent months.
Would it be true to say that copper mines are globally depleting?
I wouldn't say that they are depleting, but they find it increasingly
difficult over any period of time to extract the copper. It's becoming
much more expensive to dig it out of the ground. I think, we're going
to see that the marginal cost of getting the copper out of the ground
is going to go up. This means it will be very difficult to increase
the supply of copper too much upon what we have today.
Can the expectations for construction growth in emerging economies,
particularly India and China, affect copper prices?
We've seen Chinese demand for copper stabilize, after a very large
increase in demand in 2009, related to China's fiscal stimulus. Going
forward, we don't expect to see that high growth in demand for metals
from China, for two reasons. Firstly, the fiscal stimulus is starting
to unwind, so the public investment growth probably won't be as high.
Secondly a lot of Chinese users of copper have built up some stocks
which they need some time to run down - actually they have been
doing it for a while, but they have a bit further to go. The bottom
line appearing to us is that metal prices, and copper prices in
particular, probably will continue to rise if we start to see the
global recovery on track as outlined by the latest projections of
the World Economic Outlook. That would be positive, but we shouldn't
expect too much dramatic upside, simply because the Chinese growth
is going to moderate.
In terms of risks, right now the risks for metals, and copper again in
particular, are going to be upside too. So if the market will be taken
by surprise, it is more likely to be in terms of prices being higher
rather than lower. So there are mainly upside risks on the prices.
Do you think the worldwide automotive industry will be exiting the
slowdown of 2008-09, and at what extent it will contribute to the
rise in prices for copper?
What we would say from the macroeconomic prospective is that the
demand in advanced economies, consistent with the growth projections
of the WEO, is going to be pretty weak going forward. We're going to
see some consumer demand coming through, but realistically in many
advanced economies, demand is going to be quite modest. If we look at
the emerging economies, much is going to depend on their ability to
rebalance demand. One of the big things today is rebalancing demand in
China and other emerging economies, away from exports towards domestic
consumption. Domestic consumption is rising in these economies,
but particularly in China it is still relatively low compared to
GDP. So there is potential for a quite robust and strong automobile
demand growth globally, but it will really depend on the extent to
which some key emerging economies can rebalance from exports towards
consumer-driven economic growth.
Is there an encouraging outlook for another important consumer -
the housing market?
Actually I think that housing demand is going to be a very important
driver. But I think more important for copper probably will be
infrastructure - with China and India building electricity generating
networks, roads, ports, airports, transport infrastructure. These
are projects that are going to support the demand for copper going
forward. I think a lot of emerging economies are going to invest
heavily in their infrastructure. So, along with the importance of
housing, I think in the next 2 - 3 years the most significant impetus
will come from infrastructure investment.
Do you think that surging prices for copper may prompt the producers
of mining equipment and chemicals to raise their prices too, once
their products are demanded?
I think the investing environment for the mining companies is a
good one, for two reasons. First is, of course, prices for metals
have recovered, and in many cases are quite high from the historical
prospective. The second is that the costs of investment are quite low.
All the mining companies have a strong cash flow, and it will
be quite easy to raise relatively cheap capital in financial
markets. Cheap financing and, of course, high unemployment makes
the cost of investment quite low for most companies. But in many
cases the challenge are not the investments themselves, but rather
the constraints on them, particularly the technology. You need new
technology now to access the most important deposits of copper. The
current technology may not be sufficient to get the copper you need
to meet the demand. And implementing new methods of extraction and
refining is going to take a little bit more time.
I think another important factor for some metals, not so much for
copper, but rather for the aluminum and lead, are environmental
concerns. In many countries we see environmental regulations
restricting the extent to which mining companies can mine and
refine the ore. In China we've seen a lot of aluminum and lead
refineries having their activities curtailed by the government due
to environmental concerns. These reasons may act to slow down the
investments to some extent. So we might see an unusual situation when
the companies would have to invest more, but may not bring as much
supply as ten years ago.
Do you think consumers will tend more actively to substitute copper
with cheaper materials - say, aluminium in electricity networks?
What we've seen in commodities during many many years, is that the
end users are always looking for the ability to substitute a high
price with a low price commodity. Wherever that is possible we will
certainly see that. You know that one of the ways to substitute it in
communication is fiber optic. But in many cases copper is irreplaceable
- it is the best material you can use.
Are copper miners likely to face higher costs of ore transportation,
regarding energy prices?
That's very important point, because if energy prices go up, they
will have an effect across a vast number of commodities - from
metals to foods. Right now the outlook for the energy prices is
relative benign, as there is a lot of spare capacity in the crude
oil market, which could be used to prevent the prices form surging
too high. The other aspect is that in contrast with the metals, in
energy markets the advanced economies are more important consumers
than the emerging economies. And if the growth is expected to stay
relatively modest in advanced economies, demand growth for energy
should be quite restrained as well. The bottom line is that the prices
for energy probably will continue to rise modestly, but we don't see
prices rising significantly, so overall transportation costs should
be relatively well contained for the miners.
Thank you
From: A. Papazian
Aram Gareginyan
ArmInfo
2010-11-03 13:59:00
Interview with Economist in charge of commodities at the IMF Research
department, Sean Roache
One cannot try to predict copper prices and stay local. Copper
concentrate is one of Armenia's essential exports. The largest consumer
of copper still remains China. However distant that country may seem,
it is proving again that the world is rapidly shrinking. How Chinese
Government thinks and acts, may affect the revenues of Armenian budget
- and the quality of life of teachers and pensioners nationwide.
What recent trends have been most important in the copper market?
What has been most important in the last 2 - 3 years has been the
demand from China. Without any doubt, that is the biggest influence on
copper. Around 40% if global copper demand is now generated by China
alone. Among the reasons for that is that China has been investing
very heavily in infrastructure - electricity buildings, networks, etc.
The marginal growth has really come from emerging economies in general,
and China in particular, and its infrastructure investment - in part,
or actually very largely driven by the government and fiscal stimulus
we've seen in China for the last two years. So that's the demand side.
What makes copper different from some other metals is real supply
side concerns. What we've been seeing in the last 2 - 3 years is the
reports coming from the largest copper mines in the world, that their
rates of production have been disappointing. In fact, productivity of a
lot of the largest copper mines s starting to get worse. All they are
digging out of the ground is not of as high quality as it was maybe 5
years ago. All this is leading to a tight supply - demand balance. And
that's leading to a big decline in copper stocks, and contributing
to the rise in prices that we've seen in the recent months.
Would it be true to say that copper mines are globally depleting?
I wouldn't say that they are depleting, but they find it increasingly
difficult over any period of time to extract the copper. It's becoming
much more expensive to dig it out of the ground. I think, we're going
to see that the marginal cost of getting the copper out of the ground
is going to go up. This means it will be very difficult to increase
the supply of copper too much upon what we have today.
Can the expectations for construction growth in emerging economies,
particularly India and China, affect copper prices?
We've seen Chinese demand for copper stabilize, after a very large
increase in demand in 2009, related to China's fiscal stimulus. Going
forward, we don't expect to see that high growth in demand for metals
from China, for two reasons. Firstly, the fiscal stimulus is starting
to unwind, so the public investment growth probably won't be as high.
Secondly a lot of Chinese users of copper have built up some stocks
which they need some time to run down - actually they have been
doing it for a while, but they have a bit further to go. The bottom
line appearing to us is that metal prices, and copper prices in
particular, probably will continue to rise if we start to see the
global recovery on track as outlined by the latest projections of
the World Economic Outlook. That would be positive, but we shouldn't
expect too much dramatic upside, simply because the Chinese growth
is going to moderate.
In terms of risks, right now the risks for metals, and copper again in
particular, are going to be upside too. So if the market will be taken
by surprise, it is more likely to be in terms of prices being higher
rather than lower. So there are mainly upside risks on the prices.
Do you think the worldwide automotive industry will be exiting the
slowdown of 2008-09, and at what extent it will contribute to the
rise in prices for copper?
What we would say from the macroeconomic prospective is that the
demand in advanced economies, consistent with the growth projections
of the WEO, is going to be pretty weak going forward. We're going to
see some consumer demand coming through, but realistically in many
advanced economies, demand is going to be quite modest. If we look at
the emerging economies, much is going to depend on their ability to
rebalance demand. One of the big things today is rebalancing demand in
China and other emerging economies, away from exports towards domestic
consumption. Domestic consumption is rising in these economies,
but particularly in China it is still relatively low compared to
GDP. So there is potential for a quite robust and strong automobile
demand growth globally, but it will really depend on the extent to
which some key emerging economies can rebalance from exports towards
consumer-driven economic growth.
Is there an encouraging outlook for another important consumer -
the housing market?
Actually I think that housing demand is going to be a very important
driver. But I think more important for copper probably will be
infrastructure - with China and India building electricity generating
networks, roads, ports, airports, transport infrastructure. These
are projects that are going to support the demand for copper going
forward. I think a lot of emerging economies are going to invest
heavily in their infrastructure. So, along with the importance of
housing, I think in the next 2 - 3 years the most significant impetus
will come from infrastructure investment.
Do you think that surging prices for copper may prompt the producers
of mining equipment and chemicals to raise their prices too, once
their products are demanded?
I think the investing environment for the mining companies is a
good one, for two reasons. First is, of course, prices for metals
have recovered, and in many cases are quite high from the historical
prospective. The second is that the costs of investment are quite low.
All the mining companies have a strong cash flow, and it will
be quite easy to raise relatively cheap capital in financial
markets. Cheap financing and, of course, high unemployment makes
the cost of investment quite low for most companies. But in many
cases the challenge are not the investments themselves, but rather
the constraints on them, particularly the technology. You need new
technology now to access the most important deposits of copper. The
current technology may not be sufficient to get the copper you need
to meet the demand. And implementing new methods of extraction and
refining is going to take a little bit more time.
I think another important factor for some metals, not so much for
copper, but rather for the aluminum and lead, are environmental
concerns. In many countries we see environmental regulations
restricting the extent to which mining companies can mine and
refine the ore. In China we've seen a lot of aluminum and lead
refineries having their activities curtailed by the government due
to environmental concerns. These reasons may act to slow down the
investments to some extent. So we might see an unusual situation when
the companies would have to invest more, but may not bring as much
supply as ten years ago.
Do you think consumers will tend more actively to substitute copper
with cheaper materials - say, aluminium in electricity networks?
What we've seen in commodities during many many years, is that the
end users are always looking for the ability to substitute a high
price with a low price commodity. Wherever that is possible we will
certainly see that. You know that one of the ways to substitute it in
communication is fiber optic. But in many cases copper is irreplaceable
- it is the best material you can use.
Are copper miners likely to face higher costs of ore transportation,
regarding energy prices?
That's very important point, because if energy prices go up, they
will have an effect across a vast number of commodities - from
metals to foods. Right now the outlook for the energy prices is
relative benign, as there is a lot of spare capacity in the crude
oil market, which could be used to prevent the prices form surging
too high. The other aspect is that in contrast with the metals, in
energy markets the advanced economies are more important consumers
than the emerging economies. And if the growth is expected to stay
relatively modest in advanced economies, demand growth for energy
should be quite restrained as well. The bottom line is that the prices
for energy probably will continue to rise modestly, but we don't see
prices rising significantly, so overall transportation costs should
be relatively well contained for the miners.
Thank you
From: A. Papazian