How 18th Party Congress in China related to Copper

Last Updated : 13 September 2012 at 12:00 IST
China is on the verge of leadership change. Widely expected to be held on a date in October, China's 18th Party Congress is expected to replace 70% of the top leadership. This includes the current President Hu Jintao.

So, what does this leadership transition has to do with Copper? Everything!

It is text book knowledge that China is the biggest consumer of copper. Chinese economy has been slowing down for a while and this has raised new questions about the robustness of copper. But there has been reports that the nation is intending to be aggressive in spending to prop up the economy. An infrastructure spending plan to the tune of 1 trillion yuan has already been approved, as per reports.

The plan is speculated to involve power grid expansions (copper wires claim 50% of China's copper consumption, as per Barclays) and housing unit expansions at 36 million entities.

But as many would believe, this is just the tip of the iceberg. Chinese Premier Wen Jiabao has said China has ample strength both in monetary and fiscal domains and would “appropriately use that for preemptive policy and fine-tuning to propel stable economic growth”.

The question is when?

While the current stimulus measures may prove to be thoroughly inadequate, it does have a political motive behind it; a temporary measure to address the humongous expectations of an expanding populace facing rapid slowdown.

The sanctioning of 36 million housing units is a good indication of a policy of appeasement. The country reportedly spends equal amount on external defence and internal stability management and the sanctioning of 36 million housing units is far better an idea than employing gun-wielding security personnel.

But given that the economy, the second largest in the world has more to do in terms of monetary, fiscal maneuvering, the current leadership would not go beyond a point especially since a transition is in sight.

They may want the new leadership to start off with additional stimulus measures as that would be a fundamentally convenient way of executing sensitive measures. The current leadership may be hands-on whereas here they may have a 'hands-off' approach. They may of course have a plan; but they would possibly want the new leadership to implement them.

This of course has ramifications on copper prices.

There are two possibilities here: either the new leadership employ the tools, or they may choose not to. The latter scenario is highly unlikely, still there could be Black Swan events that may change the course of global economy.

The former scenario, if that be the case, would result in the leadership taking more time to finalise the plans; since these are highly sensitive with potent after-effects. It has also to be seen if China would await the impacts of possible US stimulus measures and then decide on its own stimulus measures.

This scenario, on materialisation means copper and other metals may first ride the QE3 wave (if that be announced today) and then a possible Chinese easing wave.

All this may begin with the 18th Party Congress providing some useful hints for the markets.

As published in: http://www.commodityonline.com/news/how-18th-party-congress-in-china-related-to-copper-50309-3-50310.html

How slowdown in China could drive Copper higher

Last Updated : 10 August 2012 at 12:00 IST
Commodities are mostly about China and China is mostly about commodities. And this necessarily means that China, if it grows or if it slows down could fuel rallies. However both rallies would be distinctly different and both would have different implications.

Let me explain:

We have two scenarios: Either China can slow down or China can grow. The latter scenario, as per fundamental economics is good for commodities and warrant no explanation.

So let's focus on the former scenario.

China trade balance missed its standard mark when exports climbed just 1% in July from year ago period and imports rising 4.7%; Chinese trade surplus stood at $25.15 billion. Deutsche Bank, meanwhile has cut the Q3 growth of China to 7.5% from 7.9%; Q4 growth is estimated at 7.7% revised down from 8.1%. The bank expects 2012 GDP growth of China to be at 7.7% from 7.9%. 2013 growth forecast is pegged at 8.2% from 8.4%.

This data may not portray a rosy picture for commodities. As Bhavik Patel, Commodity Analyst with Commodity Online says:

“Slowdown in China is not good for commodities because usually the prices are driven up by demand only. Slowdown signifies drop in commodity prices but because of slowdown, the expectation will build up for stimulus measures and that will provide a relief rally in commodities.”

At the moment market will focus on slowdown data and after the correction, the relief rally will come on anticipation of stimulus measures, he added.

So we may have a stimulus rally; but which all commodities would benefit?

“Copper...” Patel said and added, “Copper would benefit the most as China is the biggest consumer, rest of metals would follow but copper would gain the most.”

But will there be a stimulus at all?

"China will not escape from the global slowdown," Banny Lam, China economist at CCB International in Hong Kong was quoted by Reuters as saying. He is expecting Chinese government to free the cash reserves that banks should hold, so that additional boost would be provided to the economy.

There are already reports that China has made some investments in the railway sector. Besides Chinese inflation has come down to 1.8%.

So, if the Chinese juggearnaut slows down copper would make losses; only to make a triumphant come back.

As published in: http://www.commodityonline.com/news/how-slowdown-in-china-could-drive-copper-higher-49664-3-49665.html