Copper Demand Growth in China to Slow in Inflation Battle, JPMorgan Says

Bloomberg Jan 17---Growth of copper consumption in China, the world’s biggest user, may almost halve this year as the government curbs monetary expansion, cooling demand, said Michael Jansen, metals strategist at JPMorgan Securities Ltd.

“Weaker Chinese demand growth is starting to materialize, courtesy of the tighter restrictions on credit and energy availability,” Jansen said at a conference in Shanghai Jan. 15. Real consumption is likely to gain about 7 percent to 7.88 million metric tons, down from 13 percent in 2010, he said.

Copper surged to a record $9,754 a ton in London Jan. 4 on expectations that supply will lag behind demand and as investors sought commodities as a hedge against currency debasement. China last week told banks to set aside more deposits as reserves for the fourth time in just over two months, stepping up efforts to rein in liquidity and cool inflation after foreign-exchange holdings rose by a record and lending exceeded targets.

“We see a slowdown in output growth for major consuming sectors such as home appliances, power, construction and transport vehicles,” said Ren Gang, head of research at Maike Futures Co.

Copper demand may grow by at least 6 percent to 7.74 million tons this year, slowing from 10 percent in 2010, according to Bonnie Liu, a metals analyst at Macquarie Group Ltd. Researcher Beijing Antaike Information Development Co. predicted growth to slow to 8 percent from 11.5 percent. Copper dropped 0.4 percent to $9,615 a ton today.

China’s Economy

China’s economy will grow 8.7 percent in 2011, down from 10 percent last year, “due in part to the unwinding of fiscal stimulus, restrictions placed on overheating sectors,” such as housing, and tighter monetary policy to help reduce price increases, the World Bank said Jan. 12.

The central bank last week said it will lift the reserve requirement ratio by 50 basis points starting Jan. 20 as it moves to curb lending and liquidity as inflation runs at the fastest pace in more than two years.

“The risk is that this runs deeper into 2011 than we are expecting,” JPMorgan’s Jansen said.

Chinese exports of home appliances, a major user of copper, may grow at a slower rate this year as an appreciating yuan will make products less competitive, said Hu Xiaohong, head of the information and consultation department at the China Household Electrical Appliances Association.

The yuan touched its strongest level since 1993 on Jan. 14 as the U.S. made renewed calls for China to allow appreciation before President Hu Jintao’s visit to Washington this week.

Negative Factor

“There are still uncertainties in the global economic recovery this year; this will also be a negative factor,” said Hu from the appliances association at the Jan. 15 meeting.

Copper surged 30 percent in 2010 as the global economy recovered from the worst recession since World War II. Usage of copper in air-conditioners represents 60 percent of the demand in the home appliance sector, said Hu.

The recent rally in copper prices is “not fully supported” in the near term as demand from the power industry in China may fall short of expectations, Na Liu, China strategy adviser to Scotia Capital, said last week.

China State Grid Corp., the nation’s largest operator of electricity networks, is planning an 11 percent increase in fixed-asset investment this year, the Beijing-based company said in a Jan. 10 statement. That is less than the 45 percent increase the market had been expecting, Liu said.

Stockpiles at the Shanghai Futures Exchange warehouses advanced to the highest level in seven months, adding 481 tons to 132,647 tons last week, according to the bourse.

World Shortage

China produced 4.37 million tons of refined copper in January-November, or 13 percent more than a year earlier, according to the National Bureau of Statistics. November output jumped to a record of 443,000 tons.

The world refined copper market is expected to have a deficit of 500,000 tons to 600,000 tons in 2011, even with a significantly weaker demand scenario, said JPMorgan’s Jansen.

Macquarie said in a research report on Dec. 27 that the shortfall would be 550,000 tons. The International Copper Study Group has predicted a shortage of 435,000 tons.

China is expected to import more of the metal in the first quarter, which should underpin the record level price, said Yang Changhua, a senior analyst at Antaike on Dec. 22. Yang has been researching copper in China for 15 years.