Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

A big part of President-elect Donald Trump's appeal was his promise to restore, among other things, U.S. manufacturing and mining jobs that have disappeared over several decades.

Color me skeptical on that one being delivered as hoped. A big infrastructure investment plan, however, does appear to be in the works, worth perhaps $1 trillion. Copper prices have surged on the back of it, up 13 percent since Tuesday and extending a rally that began 3 weeks ago.

Galvanized
Copper's rally accelerated after the election, taking the price to its highest since the summer of 2015
Source: Bloomberg
Note: London Metal Exchange 3-month forward price.

Copper bulls may be indulging in a little nostalgia of their own here, though -- and meanwhile forgetting some other promises Trump has made.

As Liberum Research pointed out in a report published on Friday, the U.S. just isn't as big a consumer of copper as it used to be.

Globalized
China now accounts for more than half of global refined copper demand versus 7.5 percent for the U.S.
Source: Bloomberg
Note: Data show trailing 12-month demand for refined copper through August 2016.

That chart pretty much sums up the economic resentments that played some part in Trump's victory. The salient point for copper investors, though, is that a 10 percent increase in U.S. copper demand is equivalent to less than a 1.5 percent increase in Chinese copper consumption. And we haven't seen U.S. demand grow at anything close to that pace in almost 20 years.

 

Still, extra demand is extra demand. Construction takes about 44 percent of U.S. copper consumption, so a broad infrastructure program would no doubt provide a boost to the market.

But that's only if Chinese growth remains on track.

As fellow Gadfly David Fickling wrote earlier this month, this rally got a boost before the U.S. election, in the shape of a strong reading for Caixin's manufacturing purchasing managers' index, a closely watched gauge of Chinese industrial activity.

Yet, as he also noted, physical copper premiums -- the margin over the spot price that buyers pay to secure a long-term supply -- remain pretty weak. And while the copper futures curve has risen, it remains in an upward slope, which doesn't suggest supply and demand are that tight. And, as Liberum points out, new housing starts have turned negative, year over year, in the vast majority of China's cities since the summer -- a bearish signal for demand.

The twist is that another key plank of Trump's populist message was, essentially, sticking it to China as part of a roll-back of free trade. Protectionism, with its attendant deadening effect on trade, presents a big risk to commodity markets in general.

In copper's case, it is worth recalling that China's trailing consumption of refined copper surpassed that of the U.S. in May 2002, just 5 months after China joined the World Trade Association. The supercycle pretty much started there.

Money has already begun flowing out of funds linked to emerging markets, amid nervousness about a protectionist backlash and an uptick in Treasury yields as Trump's stimulus plan stokes inflation expectations. And, as the numbers show, if China suffers, even a 1 percentage point reduction in copper demand growth there would wipe out much of any fillip in demand stateside.  

Bonus twist: Trump's apparent antipathy to renewable energy.

Perhaps mindful that the rapid industrialization of China witnessed already cannot be sustained forever, the head of marketing and supply at global miner BHP Billiton foresees other drivers of long-term demand for copper. Speaking at a Bloomberg Intelligence forum in London earlier this month, Arnoud Balhuizen identified electric vehicles and renewable energy infrastructure as two important ones.

As I wrote here, Trump may slow the momentum of such technologies in the U.S. but their expansion elsewhere will continue regardless. Still, along with his wider trade agenda, copper bulls should be wary of thinking America is about to make their market great again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net