China's Copper Demand To Rebound Strongly In 2007 - UBS

Copper demand in China, the world's largest consumer, remains healthy and will likely rebound strongly in 2007, possibly by as much as 8%-10%, says a report from investment bank UBS AG (UBS).

While warning that China's supply and demand trends point toward a bearish short-term scenario, the outlook for copper in 2007 should improve due to a slowdown in sales of the metal by China's State Reserve Bureau and a resurgence in Chinese imports, wrote the author's report, Robin Bhar, after a recent trip to China.

"We believe that real underlying (Chinese) copper consumption growth is still robust, albeit down on the heady rates of a few years ago."

Copper prices have stagnated within a $7,000-$8,000 a metric ton range for the past five months, after rallying to an all-time high near $9,000 in May on tight supplies and inflows of fund money into the red metal.

However, rising stocks on the London Metal Exchange in recent months and reports of sharply lower Chinese copper imports have damped sentiment, with some bears predicting the combination of a slowdown in the U.S. housing sector, a large copper consumer and falling Chinese demand will bring about a steep fall in prices by 15%-30% in 2007.

In Asia early Tuesday, the three-month LME forward contract was trading at $6,997.50/ton, down $2.50 from the London afternoon kerb.

UBS, though, is recommending a buy on copper as it expects a strong rebound in Chinese consumption in 2007 based on its survey of market players during its visit to China.

UBS attributes the fall in Chinese copper imports this year to higher-than-expected selling volumes from China's State Reserve Bureau, de-stocking by consumers and underreporting of scrap, which have masked the "underlying" demand amount.

It even suspects that the difficulties in calculating China's demand are a "smokescreen and a clever ploy aimed at getting copper prices lower to (make) fresh purchases."

But UBS says demand from China's power and construction sectors and expanding auto industry should be a strong consumption driver, as the economy will continue its rapid expansion despite the government's efforts to maneuver a slowdown.

As well, copper imports are expected to pick up once the Chile-China free trade agreement begins in 2007. Consumers will be able to import Chilean copper duty-free, which UBS believes will make them affordable vis-?vis the domestic price.

These growth drivers will be more than enough to offset demand destruction and China's domestic mined copper production, which has grown faster than expected, as has the mined production of most metals.

"China's production response was one of the biggest surprises in 2006."

Still, despite its conviction that Chinese demand will recover in 2007, UBS doesn't expect that buyers in China will come out in force.

Copper prices above $5,000/ton will force Chinese consumers to remain spot buyers, and only if they fall below this level will the market see substantial buying, including from the State Reserve Bureau.

"The majority of market participants would continue to operate on a hand-to-mouth basis preferring to buy on the dips," UBS concluded from its survey.