Conclusion: Chinese copper imports were up 78% y-o-y in December reaching a new high for monthly imports. We think this is an important and supportive data point of Chinese growth bottoming and supportive of our long Chinese thesis.
Positions: Long China via the etf CAF
Copper is often jokingly referred to as Dr. Copper with the insinuation being that copper has a Ph.D. in economics given its sensitivity to economic demand. Globally, copper use is broken down into the following categories of end market demand: electrical wires (60%), roofing and plumbing (20%), industrial machinery (15%), and other alloys (5%). As such, demand for copper is very economically sensitive and is often a leading indicator for economic growth, so the commodity’s nickname is fitting.
In the commodity markets, marginal increases or decreases in demand can be critical in determining price. One of our key Q1 2012 themes is Growth Slowing’s Bottom, which implies that economic growth is bottoming. The next phase, of course, is economic expansion, which will lead to increasing demand for commodities, such as copper. Interestingly, the most recent data from China on copper imports suggests that the Chinese may be beginning to prepare for accelerating growth, or at the least that the Chinese do not anticipate a slow down.
In the chart below, we’ve outlined copper imports in China going back to January 2008, which highlights that copper imports have been accelerating for seven straight months. Importantly, copper imports reached an all-time high for monthly imports in December 2011, up an astounding +78% y-o-y, to 406,937 metric tons. This acceleration in demand is particularly noteworthy in that Chinese imports were down in both 2010 and 2011, -8.4% and -3.0%, respectively. Thus, the December copper import data appears to be signaling that the demand profile for Chinese demand is improving.
The pickup in Chinese demand for refined copper comes at the same time as both GDP growth and industrial production have also provided support for our Growth Slowing’s Bottom theme and long Chinese equities position. Recall, China’s real GDP grew at +8.9% in Q4 2011 versus an expectation of +8.7% and industrial production grew +12.8% in December versus a forecast of +12.3%. Even though copper inventories in China are at a nine month high, the Chinese are clearly betting that demand for copper is poised to accelerate, so they are attempting to buy ahead of an increase in the price of copper.
In the global copper supply and demand model, Chinese growth and demand are the primary input. Depending on whose estimates we use or believe, Chinese is approaching anywhere between 40% and 50% of global copper production, the vast majority of which is imported from abroad. So, as Chinese growth shifts on the margin, it’s obviously very influential to the price of copper.
In the chart below, we’ve highlighted our current quantitative levels on copper, which highlight that copper has gone bullish TREND driven by the dynamics outlined above. It is important to note, though, that copper remains below its TAIL line of resistance at $3.98 per pound. To get incrementally bullish on copper, we will need to see it breakout above its TAIL line.
From a relative price perspective, we also took a look at the gold / copper ratio going back more than twenty years. Based on this ratio, and as the chart below shows, copper is near its cheapest level as priced in gold. Currently, one ounce of gold can buy 440 pounds of copper. This is more than one standard deviation above the twenty year average of 349, and it is 148% above the low for that period.
It is also noteworthy to highlight that the world’s largest importer of gold is India, who is expected to import 54% less gold in Q4 2011 than in Q4 2010. This is obviously in stark contrast to the growing demand from the largest importer for copper, China. At least partially, this is a function of copper prices being down -20.1% last year and much cheaper and gold being up +10.1% and being more expensive. If there is one repeatable pattern in investing, it is reversion to the mean.
Daryl G. Jones
Director of Research