MONTREAL - In the English-speaking world, it was once popular to suggest the
irrelevance of an idea by asking rhetorically, "But what's that got to do with
the price of tea in China?" Today, however, everything in the global economy
seems one way or another tied into the price of copper in China. The metal has
acquired a higher profile than usual as an indicator of international economic
health.
Bloomberg News reports the Copper Development Association's credible claim that
400 pounds of copper is used in constructing a house and 50 pounds in
constructing an automobile. According to Reuters, nearly half of all US copper
consumption is traceable to building construction. Copper is thus considered a
leading indicator of not just US but global industrial activity, perhaps the
most important of the (nonferrous) base metals, which also
include zinc, tin, lead, nickel and aluminum.
The metal is used extensively in electrical applications, pipes, roofing,
shipbuilding, and many household products, especially in numerous copper alloys
of which the most familiar are bronze and brass.
Thus Chinese demand for copper has been much in the news over the past year
(see Chinese
doubts weigh on commodities, Asia Times Online, October 2, 2008), not
least due to the publicity this year around the US$19.5 billion plan for
Aluminum Corporation of China (the state-owned aluminum firm better known as
Chinalco) to increase its stake in the Australian mining giant Rio Tinto.
This maneuver collapsed in June when Rio Tinto reached an arrangement with the
iron-ore operations arm of BHP Billiton. The Australian government was
particularly happy at this, as the Chinalco move had been seen domestically as
a threat to the country's economic sovereignty.
Citibank affirms that Chinese buying was the driving force behind the price
rally in copper and other base metals in recent years up until the outbreak of
the current global economic crisis. Prices fell late last year and early this
year, as Chinese industry ramped down production and consumed existing supply
stocks; copper then led the rebound in base metal prices in the second half of
the current year's first quarter, as Chinese buying in February and March set
off a price recovery.
Yet a longer-term driver of world prices will be India's consumption of the
metal, according to a spokesman for Indian metals company Hindalco, which
claims to have 40% of the domestic copper market, where it competes with
Sterlite Industries, the country's biggest copper producer.
This is probably true in general, but the strength of that driver will depend
on the newly elected government's success in expanding of demand in the power
sector (building new stations makes for strong copper demand). This requires
them, however, to make good on long-standing promises to bring electricity to
regions lacking it, especially in the countryside.
However, such attempts at electricity industry reform have for years run up
against bureaucratic resistance in the various states against unbundling
different services. Such unbundling would mean marketizing the economy in even
such fundamental activities as power generation and distribution. The
difficulties faced by such unbundling policies in the European Union suggest
the order of the obstacles to be confronted.
Turkey, however, appears to be surmounting its problems in this connection that
had been evident earlier in the decade (see
Delhi's options beyond Iran, Asia Times Online, March 28, 2006), so
Indian experts would do well to look at how the policy process was sequenced
there, even though the problems of coordination and cooperation between the
center and the regions are greater in India.
The strong fluctuations in the price of copper are evident in its recovery from
a historic low near US$0.60 per pound in mid-1999 to nearly to $4/lb in May
2006 before falling to $2.60/lb in early 2007. It subsequently rose again, and
from mid-2007 through October 2008 it fluctuated at times wildly between $3 and
$4/lb, reaching a high of over $4/lb in mid-2008 before plummeting to close to
$1.25/lb towards the end of that year.
Since the reversal of prices in mid-2008, copper has been the worst performer
among the base metals, due largely to lower Chinese demand. Uncertainties in
the US auto industries also depressed the price.
Copper prices have since recovered in fits and starts to $2.45/lb most
recently, although with such near-term volatility that two weeks ago this was
as low as $2.15/lb. As prices have lately risen again, there is controversy
over how much of the rise is due to genuine economic production and how much is
due simply to restocking the depleted stores of the metals.
To be sure, the US and European housing and automobile industries have provided
no demand to support the increased prices. Consensus expert opinion therefore
seems now to be trending towards the latter of the two views mentioned,
suggesting that China has not only restocked inventories but has also sought to
establish a "strategic reserve" in the metal.
It is likely that copper prices are now near their high for the year, although
a finishing blow-off peak is not ruled out, depending on specialist
manipulation of popular market sentiment and the degree of mania the extrinsic
events feed into non-expert investment decisions.
It is more likely, however, that any such sentiments will be reflected in the
prices of precious metals rather than base metals.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and The University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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