China drives copper prices -- and maybe manipulates them

By Joanne Lee-Young
Vancouver Sun
Monday, February 5, 2007

http://www.canada.com/vancouversun/news/business/story.html?id=1d606af4-...

The copper bulls are duking it out with the copper bears. Each side says look at China. Both have British Columbia mining companies watching with interest.

The debate is on because copper has been slipsliding. Lately, it has been holding on at around $2.60 US for .45 kg (one pound), down some 35 percent from a May 2006 stratospheric high of just under $4 for .45 kg.

There are a slew of reasons. Pundits talk about hot hedge fund money pouring out of copper as quickly as it rushed in.

But wipe away some of the froth and China remains a major issue.

It "is a bigger consumer than the U.S., far surpassing it in terms of volume," said Scotiabank Group vice-president of commodity market research Patricia Mohr. "China's performance and industrial activity is the most important factor driving [copper] volumes and prices now."

When prices were high last year, Chinese copper importers responded by turning away from the world market. Instead, they dug into inventory held by the country's own State Reserve Bureau and used cheaper substitutes like copper scrap.

Analysts generally agree on this sketch. However, they disagree on what is left of China's internal stockpile and what it will need to buy in 2007.

Mohr of Scotiabank thinks that Chinese imports of copper will rebound this year and forecasts consumption to rise by eight per cent. To compare, China's "apparent consumption only edged up 3 percent in 2006 after double-digit gains in previous years," said Mohr.

"China will be back into the international market this year, buying more copper to replenish inventories."

Last December, UBS investment bank's London-based mining analyst Robin Bhar travelled to China to survey market players there. In a report, he suggested that murkiness in trying to figure out China's true demand for copper was, in fact, a "smokescreen and a clever ploy aimed at getting copper prices lower to [make] fresh purchases." He is also calling for a strong rebound in 2007 Chinese copper consumption, pegging the increase at as much as 10 percent.

Merrill Lynch, however, thinks that China will increase its domestic production of copper and that users there will become increasingly price sensitive, refusing to restock unless prices drop some more. It thinks that this, combined with declines in the U.S. housing sector, will send copper prices on a 30-percent decline in 2007.

Last week one analyst in Toronto threw up his proverbial hands in a note to clients. "Will the real numbers on China stand up?" wrote Octagon Capital Corp. research analyst Henrik Visagie. He mused that for weeks, many estimates had recorded a drop in China's 2006 copper consumption. Then another group popped up, noting a 15.4-percent rise.

In the end, Visagie reconciled for himself that the Chinese economy is still booming and that it appears short on copper. "Anecdotal reports indicate that Chinese copper consumers are operating hand-to-mouth. We expect that once Chinese New Year [in mid-February] is over, China's imports will take off." He too is calling for a double-digit jump in 2007 Chinese copper consumption.

B.C. mining companies are getting used to scratching their heads at this back and forth. They have to, as their industry is increasingly tied to growth in China.

Mike Schwartz, a market research analyst for Teck Cominco, B.C.'s biggest copper producer, said that with 30 percent of the world's copper being consumed by China, "you have to watch what they do. Their participation in the market is important for overall demand and whether inventories are going up or down and what people's perception of where the price should be going."

Robert Pease, chairman of the Association for Mineral Exploration B.C., used real estate terms to describe the importance of demand from China.

Mining in B.C. is expensive. There is less copper in a given tonne of B.C. rock compared to elsewhere in the world. So a lot of money is needed to get projects started here.

That's the down payment.

China, he said, is like a basement suite that you can rent out. "It guarantees a certain level of income that you can see and that is key to financing and to new projects," said Pease, who is also president of Terrane Metals, an emerging B.C. copper producer.

The president of the Mining Association of B.C., Michael McPhie, said that Chinese consumption is "probably the single greatest contributing factor to a situation where supply, the bringing on of new mining projects or increased production from existing mines, cannot keep up with demand."

He added that the mining industry has been looking to China for investment. "There are a number of significant number of projects in B.C. waiting for approvals. In many cases, maybe even some of the capital for funding these new, large-scale projects could come from companies that operate smelters in China."

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