We tend at times to treat all metals as equal, at least in terms of discussing macro issues like the China bull market story’s impact on metal prices, but a recent article by Morningstar not normally a publication taken to metals analysis makes some very interesting observations regarding the performance of various metals from before the financial crisis through today.
The main point of the article discusses the degree to which one metal can substitute another when price pressures begin to materially impact consumers’ costs. It’s a worthy topic and one we we’ll expand on in a follow-up article this week, but we became immediately interested by the relative performance of steel, aluminum and copper prices between 2006 and today.
The following graph illustrates the volatile nature of copper prices relative to steel and aluminum.
The article makes the point that for the last couple years copper supply has been tighter than steel or aluminum, causing a quicker recovery in copper prices following the 2008 financial crisis. The copper/aluminum ratio, historically only a little higher than 2 leading up to the end of 2008, has since risen to a new high of nearly 4, and stayed there. Both steel and aluminum are currently priced in line with annual averages prior to the crisis, whereas copper has remained at or near all-time highs and exhibited higher volatility.
The article put this down to the tighter supply market for copper, but while we would agree with that proposition, we wonder if there is more to it than that. China is the world’s largest copper consumer, estimated at something approaching 40 percent of global consumption by most counts, but suggested at closer to 50 percent by the Economist in its printed edition. Much of this copper is imported as ore, scrap and refined metal; as a result of this volume, China’s consumption has a disproportionate impact on global prices. China’s copper raw materials imports rose almost 50 percent between 2006 and 2010 despite the financial crisis, Li Yusheng, a senior analyst at Antaike, is quoted as saying in a Reuters article. China’s imports of steel and aluminum were by comparison almost zero; indeed, China has been a net exporter of steel for several years.
You would expect that as copper prices rose, Chinese manufacturers would make strenuous efforts to find alternatives to using copper just as the industry has in Europe and North America. In addition, you may expect that as major importers of copper, Chinese manufacturing companies may find themselves struggling against global competitors as they lack a large-scale domestic supply base unlike steel- and aluminum-consuming industries. In reality, Chinese copper consumers don’t find copper prices or availability a hindrance at all. As the China Daily observed, when priced in RMB, the price of copper is nowhere near as high in record terms as it is in US dollars.
The gradual appreciation of the RMB to the dollar is best illustrated in the graph below (apologies for the poor detail appearing on the X-scale; these are year dates from 2006 to 2011).
Source: Standard Bank
As you can see from a Chinese consumer’s perspective, the highest copper price ever paid was back in May 2006, when prices peaked at just over 83,000 Rmb/mt. Since then, prices have mostly traded in a 50,000-75,000 Rmb range (other than the 2008 crisis period, when prices dropped towards 20,000 Rmb). The average SHFE 3-month copper price since 2006 (and including the 2008 crisis) has been 57,568 Rmb. The current price for the 3-month SHFE copper contract is 57,340 Rmb, as near enough exactly on the 5-year average.
Chinese copper consumers buy when they perceive prices to the low on world markets, not because they are struggling with high copper prices, but rather because they want a good bargain. Chinese copper consumers are actually quite comfortable with the price of copper at current levels — they do not find it historically high and do not feel under more than normal competitive pressure to switch to alternatives, where they exist. This view partly explains why Chinese copper consumption has continued at such a phenomenal pace — with little or no cost inflation, what’s to stop them?