Presently, the Asian economies are the driving force for
the world’s economy. China is the largest emerging market as well as the
world’s second-largest economy. Its economy is manufacturing-intensive and also
largely export-driven. A decline in its PMI indicates a reduction in production
levels, which hampers both imports and exports. A fall in China’s production
levels results in lower imports of raw materials from countries like Australia
and Brazil. Lower demand for inputs, especially commodities, calls for a fall
in commodity prices, which again affects the businesses of commodity firms
exporting to China. There’s also the likelihood of a fall in the imports of
machinery and automobiles from Germany to the country. China has also lowered
the import of metals. China is the largest consumer of metals, so this move
resulted in a fall in stock prices for the above sectors across all equity
markets. The turmoil in the Chinese economy is also evident from the
developments in the European economy. Since, China has trade relations with
many European countries, and the decline in China’s manufacturing activity
affects the country’s imports and exports. Although the United Kingdom’s
exposure to Chinese trade is just 3.5 per cent, China’s impact on the United
Kingdom is inevitable. China’s economic slowdown has deeply affected its trade
with Germany and France (machinery and automobiles). Consequently, UK trade in
related industries, such as automotive parts, with these European countries has
also been affected. This has created turbulence in the UK stock market.
Although China, a major engine of global growth, has been
slowing for some time, financial markets have nevertheless tumbled over fears
its economic growth will decelerate faster than expected. With concerns
mounting about the country’s economic slowdown, the yuan has faced downward
pressure as investors sell the currency in markets outside China. For more than
a decade, the U.S. and other countries castigated China for its currency
policy, saying the yuan’s level gave the country’s exporters an unfair
advantage at the expense of its trading partners, but the current Yuan
devaluation of nearly 4 per cent (on 11th August 2015) initially
spurred worries in global financial markets as investors saw it as a signal
that Beijing was reverting to its old policy playbook in a desperate effort to
revive a flagging economy. The Chinese
economic turmoil fuelled worries in the U.S. that China’s political elite may
pull back on the promises it made to make the tightly managed economy more
market-oriented and open to international investment. Inflaming those concerns,
the Chinese State Council launched an effort to boost exports just days after
the currency move, including through a more flexible Yuan. China’s decision of
devaluation last month to devalue its currency riled neighbours and fuelled
investors’ fears about a sharp slowdown in the world’s No. 2 economy.
The copper market has been gripped by fears of further
weakening of global economies during the last few months. The sustained weakness
in the Chinese economy, with a slowdown in its GDP growth and fears of further
devaluation of Yuan has triggered increased weakness in this red metal market. Apart
from the turmoil of the Chinese currency, the shrinking global demand and
rising supplies have maintained sustained pressure on copper prices.
The copper market has recorded a surplus of 151 KT (Kilo
Tonnes) in January to June 2015 on the back of a 295 KT surplus for the year
2014. Outstanding reported-stocks declined during May and June, but have remained
93 KT higher than at the end of December 2014.
China's copper smelters are considering deeper output cuts
due to low metal prices and as the supply of raw material scrap and
concentrates from domestic mines falls. Lower copper production implies a fall
in exports, which again adds to China’s troublesome condition, where recovery
seems to be far-fetched, given the existing conditions.
Month on month China's refined copper production dropped
4.5 percent in July 2015, down from June 2015. World mine production during the
period January 2015 to June 2015 was 9.45 million MT which was 3.8 per cent
higher than in the same period in 2014. Global refined production rose to 11.25
million tonnes up 2.4 per cent over the previous year with a significant
increase recorded in China (up 161 KT) and India (up 48 KT).
Global consumption for the period January -June 2015 was
11,099 KT compared to 11,231 KT for the same period in 2014. Chinese
consumption in the period January - June 2015 fell by 63 KT to 5337 KT which
represented 48.1 per cent of global demand. European Union - 28 productions
rose by 0.5 per cent and demand was, at 1783 KT, 6.8 per cent above the aggregate
during the period January-June 2014. Excluding North America and outside of
China, the story for copper demand has been one of weakness in the emerging
markets and outright contraction in demand from the second- and fourth-largest
markets of Europe and Japan.
With
roughly 40 per cent of the world’s copper consumed by China, recent data
showing slower exports and manufacturing activity weighed on prices as
investors shed the industrial metal. The impact was immediately felt in
the major copper producing countries. Latin American currencies bore the brunt
of a rapid plunge in commodity prices coupled with the ongoing slowdown in the
Chinese economy. Speculations were rampant that a weakening yuan could
intensify the competition among major commodity exporters throughout the
continent. Over the last few years, Latin America and China have forged
economic ties, whereby Latin American countries provide raw materials to China,
while China processes the raw materials and exports them back to Latin America.
With China undergoing a strategic shift towards domestic consumption to drive
growth rather than exporting manufactured products, the balance of forces might
undergo a rearrangement. This shift could hurt economies that are dependent on
China for their internal growth. But, the shrinking copper demand has led to a
state of crises in copper producing mines. Codelco, the Chilean copper mining
giant, announced half year results on last week that showed profits dropping by
a third to $875 million despite an increase in production of 5.5 per cent
compared to last year and has also resorted to cut costs by around $1 billion
this year and is 60 per cent on its way to achieve that target.
The short term outlook for copper prices remains dim,
with supply from the world’s mines expected to exceed global demand all
throughout the year 2015 and continue for 2016. The latest statistics show that
average housing prices have been rising for the last 3 months. However, major
property gluts typically take several years to work through and are often
characterised by a long basing or trough period. This could easily be the phase
that China is now entering. While overall average prices have stopped falling,
the gains are patchy and confined to major capital cities. In the longer term,
China’s rebalancing towards domestic consumption and services and away from
infrastructure development and heavy manufacturing would also be a relative
negative for copper demand. Thus, the
future demand growth won’t be as great as it was a few years ago, even after
the current cyclical downturn eventually ends and the outlook for copper prices
remains bearish, with an economic slowdown in China, in particular, which is expected
to dent the infrastructure-driven demand.
