China's True Demand For Copper Is Only Half as Much as You Think
Virtually every aspect of the commodities bust has a China angle.
Forecasts for China's consumption of raw materials have proved wildly optimistic, while domestic production of certain resources have resulted in particularly severe gluts in commodities such as steel and coal.
But in one respect, China has been putting an artificial degree of upward pressure on a select resource—copper—sparing it from the worst of the rout in commodities.
For years, traders on the mainland have used copper as collateral to finance trades in which they borrowed foreign currencies and invested the proceeds in higher-yielding assets denominated in renminbi. This carry trade with Chinese characteristics allowed them to net a tidy profit.
(As an aside, however, the devaluation of yuan in August prompted analysts to wonder whether this trade has reached its best-before date—something that would have implications for the future global demand for copper, if true. Meanwhile, there have been persistent rumors of regulators cracking down on such trades.)
This practice of warehousing copper to help engage in financial arbitrage "inflated demand, kept prices higher, and led miners to raise output," according to Bloomberg Intelligence Analysts Kenneth Hoffman and Sean Gilmartin, who sought to identify the extent to which demand for copper has been buoyed by its use as collateral for such trades.
The decline in Chinese copper demand for household appliances and electronics since 2011 doesn't jibe with the headline demand statistics, the analysts note, which show the country's total copper demand increased of 45 percent from 2011 to 2015.
Moreover, when benchmarked against cement—another material widely used for construction purposes—copper's rapid rise in China looks particularly suspicious. While cement intensity, or percentage used per square meter, rose 11 percent in the time period, copper intensity surged an astounding 117 percent.
Putting all this together, Hoffman and Gilmartin conclude that "real Chinese demand may be 54 percent lower than anticipated" after stripping out the demand for copper tied to the carry trade.
That amounts to nearly 7 million metric tonnes of copper procured for use as collateral in 2015 alone, according to the pair's calculations—equal to the mass of more than 30,000 Statues of Liberty.