—Clyde Russell is a Reuters columnist. The views expressed are his own.—
By Clyde Russell
LAUNCESTON, Australia, Aug 27 (Reuters) - China has in recent years been viewed as the main driver of the global copper market, and while its influence remains strong, it’s possible that the rest of the world will take over in the short term.
Copper is currently one of the more divisive commodities among analysts, with opinions split over whether the industrial metal will continue its recent rally or lose ground over the rest of 2014.
The point is that considerable uncertainty exists over copper’s direction and much of that comes down to whatever view is held about the economic outlook for China, which consumes roughly 45 percent of the world’s copper.
While this is obviously a huge chunk of the market, it still means that the other 55 percent could exert a bigger influence, especially if its demand trend is changing.
London copper prices gained 3.4 percent between Aug. 14 and Tuesday’s close of $7,054 a tonne, although they are still down 4.2 percent since the start of the year.
The recent gains have largely been attributed to an improving outlook for growth in the United States and hopes that Europe may take steps to stimulate its struggling economies.
However, Chinese copper prices have also been rising, with the most traded Shanghai contract gaining 4.5 percent since Aug. 15 to close at 50,620 yuan ($8,230) a tonne on Tuesday.
Both London and Shanghai copper have posted strong gains since their 2014 lows of mid-March, jumping 10 percent and 16.7 percent respectively.
Part of this is due to the improving global economic backdrop plus expectations of a Chinese industrial recovery in the second half, but it may also be related to a sharp fall in reported inventories, both in London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) warehouses.
LME inventories MCUSTX-TOTAL dropped to a seven-year low of 141,275 tonnes in the week to Aug. 15, while SHFE stocks CU-STX-SGH dropped to 75,529 tonnes in the week to June 20, the lowest since December 2011.
While inventories at both exchanges have recovered slightly from those lows, they remain well below recent peaks.
The International Copper Study Group, in its latest report on Aug. 20, estimated a global deficit of refined copper of 466,000 tonnes in the first five months of this year, compared to a surplus of 251,000 tonnes in the same period in 2013.
It said global copper consumption was up 15.5 percent in the period, led by a 29 percent jump in apparent demand in China.
Copper bears, however, point to a range of factors that they expect to act as a drag on demand for the red metal over the short to medium term.
In Macquarie Bank’s Aug. 4 report “10 things we hate about copper in 2H14”, five were related to China, with top billing going to the slowdown in housing construction.
An increase in Chinese smelter output was another reason cited by both Macquarie and an Aug. 14 report from Goldman Sachs.
This is likely to cut Chinese import demand for refined copper for the rest of the year, lowering the 28 percent growth seen in the seven months to July over the same period in 2013.
However, it should mean that imports of copper ores and scrap increase to feed the increased smelting capacity. In other words, increased Chinese output of refined copper is only bearish for prices if it isn’t matched by decreased output elsewhere.
Rising production of refined copper in China may actually result in higher prices for ores and concentrates, and may help to soak up expected higher mine output in the second half as Indonesian exports resume following a deal between the government and major producer Freeport-McMoRan.
Newmont Mining Corp may also be edging towards a deal with Indonesia so that it can start exporting again.
It is likely that slower housing construction will be a drag on Chinese copper demand, but this may be a temporary situation as signs emerge that many Chinese cities are starting to ease property curbs in a bid to stimulate the sector.
Whether it’s a good idea to re-inflate the Chinese property market is questionable, but it appears likely that copper demand from housing won’t be as dire as many fear.
There also remains a question mark over the so-called dark inventories of copper in China, those that sit outside the SHFE system and are largely tied to commodity financing deals.
The multi-pledging of metals at Qingdao port has led to fears of a crackdown on commodity financing and several Western banks have expressed caution.
But so far there appears little real evidence of these unmonitored inventories hitting the market in greater than usual quantities, so this remains a risk, not a reality.
The base case for Chinese copper demand remains one of modest growth, but with slower growth in refined imports as the country ramps up smelting capacity.
That should result in more metal flowing into LME warehouses.
The question then becomes whether that flow will outweigh rising demand in the rest of the world, in which case prices will struggle to rally.
Or it could be that global demand ex-China improves enough to absorb the refined copper that may not be imported by China in the second half of the year.
It seems that monitoring demand in the rest of the world may be more important than looking at China’s copper consumption in the short to medium term.
Editing by Alan Raybould