Could US Economic Growth Offset Chinese Copper Demand?

By Shihoko Goto — Exclusive to Copper Investing News

Could US Economic Growth Offset Chinese Copper Demand? China remains the world's biggest consumer of copper, eating up as much as 40 percent of global supply. Recent signs of a slowdown in the Chinese economy have been keeping copper investors on edge, especially coupled with Beijing's efforts to cool down the red-hot real estate market. The question remains as to whether sluggish Chinese demand can be offset by the United States, which in recent weeks has shown signs of steady expansion across the board.

"Copper sentiment is a little poor at present, as markets and traders have overreacted to Chinese economic news this week. There are serious supply side issues and demand remains robust, despite the pessimism in speculative circles," said Gavin Wendt, founder and senior resource analyst at Sydney-based MineLife.

Chinese demand slows down

The fact that manufacturing in China has fallen more than expected is weighing down on the red metal. Last week, the Flash Purchasing Managers' Index, compiled by HSBC, fell to 48.1 in March from 49.6 the previous month. The latest data has only added to worries about China's growth prospects; Beijing reported earlier this year that fourth quarter GDP only reached 8.9 percent, marking the slowest expansion rate since the second quarter of 2009. For all of 2011, China's GDP reached 9.2 percent, down from 10.3 percent the previous year.

In addition, Beijing has made clear that it will take steps to keep the housing market from overheating. At the closing press conference of the annual National People's Congress earlier this month, Premier Wen Jiabao stated that the country needs to have “long-term steady and sound growth” in the property market, adding that “we must not slacken our efforts in regulating the housing sector.”

Despite the slowdown, “Chinese copper consumption is not declining, it's just that demand growth rates are moderating,” said Garrett Nelson, an associate analyst at BB&T Capital Markets in Richmond,Virginia.

Indeed, Xstrata (LSE: XTA) Copper North Queensland's Chief Operating Officer, Steve De Kruijff, said that China “will continue to drive higher rates of copper consumption." The company expects global copper demand to rise by 3.1 percent from current levels in 2012, largely due to a 6.8 percent increase in demand from China.

Speaking at the Asia Mining Congress in Singapore this week, De Kruijff added that "inventory has been built up in anticipation of strong demand ahead," with the second quarter usually being the peak period for Chinese copper demand.

US growth will not offset Chinese consumption

It is unlikely, though, that a decline in Chinese copper demand will be offset by a rise in the US economy, despite signs of expansion across the board. There is no doubt that overall sentiments have lifted, as the number of jobs in the country has increased, and the real estate market appears to have settled down, with new single-family home sale prices rising to their highest level in eight months. Manufacturing is also is showing signs of solid expansion. The Federal Reserve Bank of Philadelphia's general economic index for March exceeded analysts' expectations by reaching 12.5, up from 10.2 the previous month, and the Federal Reserve Bank of New York's latest Empire State Manufacturing Survey indicated that the sector is rising steadily; its business conditions index rose for the fourth consecutive month to 20.21 from 19.53 in February.

Yet such signs of industrial expansion in the US “will only partially offset weaker demand growth in China, simply because the US is a much smaller player in the global copper market,” accounting for only about ten percent of the global market, BB&T's Nelson said. Nelson noted that US copper consumption was effectively flat in 2011, and is only expected to rise by a low single digit this year.