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Despite crisis, analysts resolute on China's copper demand growth forecasts

[LONDON] The bursting of China's equity bubble has punctured short-term confidence, but analysts are sticking to their forecasts for the country's copper demand growth and some even see measures Beijing might take to deal with the crash as a boon.

The overriding fear is stock market losses could eventually feed into the real economy, hitting investment and demand for metals such as copper that are used in power and construction.

Copper is used as a bellwether of Chinese growth as the country accounts for about half of the metal's estimated global demand, this year at around 22 million tonnes.

Forecasts for China's copper demand growth, already lower than last year due to a slowing economy, mostly range between 1 and 5 per cent for 2015 and depend partly on estimates of buying by China's State Reserves Bureau.

GFMS analysts at Thomson Reuters have pencilled in China's copper demand growth at 3.6 per cent this year.

"Perhaps counterintuitively, the equity market rout may actually lead to higher copper demand," said Ross Strachan, manager of metals demand for Europe at GFMS, adding that more stimulus from the authorities could lift consumption from low levels.

Data over coming weeks and months will be important for assessing whether the government and central bank will need to ramp up fiscal and monetary stimulus to make sure the country reaches its 7 per cent economic growth target for this year.

"The equity collapse will have an effect on third-quarter data, but China's government has shown it is ready to act," said Leon Westgate, analyst at Standard Bank.

"I'm positive on copper from a fundamental view. There's infrastructure spending, the state grid, construction, air conditioners, electronics, cable and all the usual suspects."

Benchmark copper prices on the London Metal Exchange earlier this week fell rapidly to a six-year low at US$5,240 a tonne as markets tried to price in weaker Chinese demand.

Values have since recovered to around US$5,580.

Chinese shares have rebounded by about 15 per cent over the last couple of days due to drastic state intervention, including banning shareholders with large stakes in listed firms from selling.

Over the past two weeks Chinese authorities have cut interest rates, suspended initial public offerings, relaxed margin lending and collateral rules and enlisted brokerages to buy stocks, backed by cash from the central bank.

But Chinese shares are still down about 25 per cent since mid-June.

"Chinese end-user demand for copper remains pretty solid," said Nic Brown, head of commodity research at Natixis. "Markets were spooked, but all it reflects is the fact that Chinese stock prices went up too quickly and they have come down just as quickly. It doesn't necessarily change things in the real world, not at this stage anyway."