An analysis of China's copper demand
An analysis of China’s copper demand We believe the risk remains to the downside
Walter de Wet, CFA* [email protected] +44-20-31456821 Leon Westgate* Westgate [email protected] +44-20-31456822 21 February 2012
*Please refer to the disclaimer at the end of this document.
1
Summary The following slides provide an analytical framework to help track China’s refined copper consumption using available macro economic data. data Given that we believe China will be the main source of growth in refined copper consumption this year, we analyse the country’s copper demand by sector to determine where the risk to demand growth lies. Although we expect refined copper consumption by Europe and the US to decline in 2012, we still expect China’s refined copper consumption to grow 6.6% to 8,400K mt. In order to reach our 6.6% target we expect to see the following: (1) Chinese exports of goods containing copper grow by 1.2% y/y, (2) Chinese domestic demand for goods containing copper grow by 15% y/y and (3) square meters under construction grow another 7% y/y in China. Current monetary policy in China remains tight, with little sign of imminent easing. When monetary policy is finally relaxed, there will be a time lag between those measures and the real economic impact. In addition, this there is still significant economic and political uncertainty in Europe, delaying economic decisions not just in China but globally. In an environment where we have not yet seen substantial monetary easing within China, and policy risk in Europe remains large, we believe the risk to construction and goods containing copper lies to the downside. Furthermore, even if the PBoC starts to ease, just as in the tightening cycle, the majority of the easing will be felt with a substantial lag. As a result, we believe demand for copper is unlikely to be strong enough to see prices trade sustainably above $9,000/mt for most of this year. In fact, we continue to believe copper will average just $7,770/mt in 2012.
We still see the copper market in a small deficit in 2012 Notes
2
We expect global refined copper consumption to grow by 1.9% (or 377K mt) in 2012. Of this 1.9% growth, China will contribute 2.6%, the rest of Asia 0.27% and LatAm 0.1%. We expect Europe and the US to see -0.85% and -0.24% refined copper consumption respectively. Other regions, including Africa will add 0.05% to growth. Therefore we believe the main risk to copper prices continues to be with Chinese demand. As a result we analyse the sources of refined copper pp demand in China to better understand where those risks lie. Annual Global Supply/Demand Balance for Copper Thousands of tonnes
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012F
2013F
2014F
production Mine p Total Year-on-year % change
13,785 1.5%
14,607 6.0%
14,922 2.2%
14,990 0.5%
15,483 3.3%
15,527 0.3%
15,893 2.4%
16,015 0.8%
16,000 (0.1%)
16,380 2.4%
16,970 3.6%
17,631 3.9%
Refined production Africa North America Latin America Asia (ex. China) China Australasia Europe Total Year-on-year % change
454 2,074 3,608 3,489 1,836 484 3,309 15 254 15,254 (0.1%)
508 2,198 3,566 3,541 2,199 490 3,449 15 951 15,951 4.6%
513 2,162 3,549 3,831 2,600 469 3,533 16 657 16,657 4.4%
563 2,155 3,553 4,200 3,047 429 3,605 17 552 17,552 5.4%
673 2,157 3,586 4,254 3,499 442 3,431 18 042 18,042 2.8%
757 2,032 3,774 4,060 3,795 503 3,579 18 500 18,500 2.5%
943 1,806 3,942 3,969 4,051 446 3,442 18 599 18,599 0.5%
986 1,709 3,915 3,995 4,574 424 3,568 19 171 19,171 3.1%
920 1,640 3,880 3,940 5,214 455 3,600 19 649 19,649 2.5%
990 1,700 3,900 4,000 5,632 480 3,585 20 287 20,287 3.2%
1,100 1,730 3,970 4,141 6,026 490 3,660 21 117 21,117 4.1%
1,200 1,800 4,050 4,300 6,387 500 3,700 21 937 21,937 3.9%
Refined consumption North America Latin America Asia (ex. China) China Europe Others Total Year-on-year % change
2,900 494 4,216 3,097 4,754 332 15,793 2.8%
3,101 541 4,564 3,371 5,031 333 16,941 7.3%
2,967 552 4,522 3,540 4,814 355 16,750 (1.1%)
2,863 554 4,680 3,820 5,208 343 17,468 4.3%
2,993 542 4,892 4,525 4,890 378 18,220 4.3%
2,622 591 4,763 5,149 4,624 488 18,237 0.1%
2,400 508 4,525 6,980 3,569 349 18,331 0.5%
2,500 668 4,605 7,320 3,929 257 19,279 5.2%
2,490 640 4,635 7,900 4,008 300 19,973 3.6%
2,440 660 4,691 8,421 3,827 310 20,349 1.9%
2,484 693 4,784 9,095 3,835 347 21,239 4.4%
2,534 714 4,928 9,686 3,873 375 22,110 4.1%
(539)
(990)
(93)
84
(178)
263
268
(108)
(323)
(63)
(122)
(173)
Implied surplus (deficit)
Source: Standard Bank, MBR, CEIN
Copper demand by region - China still the most important growth centre China was the sole source of copper demand growth in 2009. While we expect growth from other regions in 2012, China should once again account for the majority of copper demand growth. We do not anticipate a repeat of the 2009 Chinese restocking of copper, unless the price is right. In 2009 copper averaged CNY34,800/mt. If the CNY appreciates by around 3% against the dollar this year, and given our USD copper forecast of $7,770/mt, we believe copper will average almost CNY50,000/mt in 2012. This price is not low enough to entice the sort of large scale restocking from China seen in 2009, in our opinion at least, particularly given tighter monetary policy.
Copper demand by region
Contribution to global copper consumption growth (%) 15
24,000
10
18,000
5
%
mt ('000)
Notes
3
12,000
0 6,000
-5 -10
2 2012
2 2011
2 2010
2 2009
2 2008
2 2007
2 2006
2 2005
2 2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2 2003
0
Others
North America
Latin America
North America
Latin America
Asia (ex. China)
Asia (ex. China)
China
Europe
China
Europe
Others
Source: Standard Bank, MBR
Source: Standard Bank
A breakdown of China apparent copper consumption – construction vs. trade We focus on 3 sectors in China – (1) the export sector, (2) the domestic consumption sector and (3) China’s construction sector. All three sectors in China are currently under pressure (relative to 2010 and early 2011). China’s growth rate of exports of goods and services has slowed from well above 20% y/y in Aug’11 to 13% y/y in Dec’11. Domestic monetary policy remains tight, capping domestic retail sales growth below 18% y/y since Mar’11. Furthermore, China’s construction sector is under pressure, with real estate sales declining from 26% y/y in Aug’11 to 12% in Dec’11. All three sectors are crucial for copper demand. Using Chinese trade and construction data, we estimate that construction accounts for around 55% of Chinese copper demand, domestic consumption for around 29% with exports adding around 16% to total demand. The impact of a Chinese slowdown in construction is therefore the decisive factor. With exports looking vulnerable to weaker demand from Europe, the burden falls on domestic consumption to fill any gap left behind from weaker construction demand.
Copper used in export , domestic and construction
China’s demand for refined copper 9,000
75%
6,750 mt ('000 0)
100%
0% 50%
4,500
25% 2,250
C Construction t ti
D Domestic ti non-construction t ti
Source: Standard Bank, MBR, CEIN
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
0% Nov-08
Notes
E Exports t
0 2008
2009
Domestic non-construction non construction Source: Standard Bank
2010 Exports
2011
2012F
Construction
4
Exports - 16% of Chinese copper consumption goes into export products
5
There is increasing concern over China’s C ’ exports in general, and the impact it may have on metal demand specifically. f
Notes
Of China’s total copper consumption, we estimate 16% (1,300K mt) is re-exported via products such as fridges, air conditioners, TV’s etc. Interestingly, the amount of copper consumed in export products has declined from 135K mt in June last year to 102K mt in December. We expect p copper pp demand from this sector to g grow byy onlyy 1.2% in 2012. This,, we estimate,, would add onlyy 17K mt to China’s copper demand. Most of the demand growth is likely to come from Asia. We estimate that around 250K mt of copper contained in products ends up in Europe, of which less than 15K mt goes to Germany (the sole engine of growth in Europe). Asia accounts for almost 640K mt while the US accounts for 230K mt. Copper used in exports (annual): the growth will come from Asia
Copper used in exports by destination (monthly): 20% of copper goes in exports to Europe
1,600
160
mt ('000)
1,200
80
40
800
400 0
Nov--08 Jan--09 Mar--09 May--09 Jul--09 Sep--09 Nov--09 Jan--10 Mar--10 May--10 Jul--10 Sep--10 Nov--10 Jan--11 Mar--11 May--11 Jul--11 Sep--11 Nov--11
mt ('000)
120
0 2008
Rest of the World Japan EU excl. Germany US Source: Standard Bank, CEIN, Bloomberg
Asia (excl. Japan) India Germany Monthly average
2009
2010
2011
Rest of the World
Asia (excl. Japan)
Japan
India
US
EU
Source: Standard Bank; OECD; World Bank
2012F
Domestic non-construction – This sector consumes 29% of Chinese copper Domestic non-construction demand is the natural counterbalance to falling demand from exports. We have seen strong growth, albeit from a low base, in this sector over the past few years. We expect this rate of demand growth to continue. Domestic consumption has risen steadily from around 150K mt copper consumed per month in domestic goods such as fridges, TV’s, and air-conditioners in 2008 to more than 221K mt in Dec’11. We estimate China consumed 2,414K mt of copper in domestic non-construction goods in 2011. We expect this to rise 15% in 2012 to 2,776K mt, despite tight monetary policy. We note that relative to export demand, domestic consumption has been the brightest spot by far. This should remain the case in coming years as China rebalances it’s economy and shifts towards higher domestic consumption. However, we do not believe that the domestic consumption sector is large enough to offset any potential decline in construction demand.
Domestic, non Domestic non-construction constr ction cons consumption mption more important than the export market
Copper used C d in i domestic d ti consumed d goods d has h been b rising steadily, approaching 2.3 million mt in 2011
4,800
400
300
3,600 mt ('000)
mt ('000)
200
2,400
100 1,200
Copper used in export products Domestic, non-construction Source: Standard Bank, CEIN, Bloomberg
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
0 Nov-08
Notes
0 2008
2009
2010
Domestic, non-construction non construction Source: Standard Bank
2011
2012F
Export prodcuts
6
Construction: The sector consumes 55% of Chinese copper
7
Chinese construction remains the main driver behind Chinese copper demand. This has been the key growth area over the past few years. We believe this sector should remain the dominant sector, despite the steady rise in domestic demand for goods containing copper.
Notes
After stabilising over H2:10 and into H1:11, Chinese property sales growth started to deteriorate in September 2011. We expect sales g growth to decline further during g the first half of 2012, mainlyy because of tight g domestic monetaryy policy, y but also due to would-be purchasers waiting for lower prices rather than panicking about missing the boat. We note that most of the growth in construction has come from the private sector, with government related property development making up only a small percent of total developments. Even in 2009 government-related construction was a small part of real estate construction. The private sector remains vulnerable to a lack of financing. Property development is private sector driven 4,800
60
3,600
Sq.m (million)
90
30
2,400
0
1,200
-30
0
Feb b-06 Jun-06 Occt-06 Feb b-07 Jun-07 Occt-07 Feb b-08 Jun-08 Occt-08 Feb b-09 Jun-09 Occt-09 Feb b-10 Jun-10 Occt-10 Feb b-11 Jun-11 Occt-11
% (y/yy)
Chinese property sales growth y/y
Source: Standard Bank, CEIN
2006 Pi Private
2007
2008
C ll i Collective
Source: Standard Bank, CEIN
2009
2010 S State owned d
2011
Construction: Chinese property sector still to impact on construction We estimate the lag between sales and new construction is 9 months. The current wobble will therefore be felt well into Q2:12. Also, as sales start to pick up again, new construction may take a while to respond to improved market conditions.
Notes
RRR cuts and signs of easing measures will be positive but will also take time to feed into sales and new construction. As a result we expect the growth in new floor space under construction to slow to around 6% y/y in August before starting to rise again g towards yyear-end. We note that the slowing growth rate of floor space under construction is a function of both base effects (due to a particularly strong 2011) and declining sales. Months lag before sales iimpactt on new construction t ti
Floor space under construction (annual comparison) – we still expect 9% growth y/y
New construction – elasticity to sales l and d existing i ti projects j t (%)
34
0.6
20
0.45
15
Months
%
18 0.3 3
10 0.15
12m MA - estimate 12m MA - actual Monthly growth rate - estimate Source: Standard Bank
10
5
Octt-12
Jun n-12
Feb b-12
Octt-11
Jun n-11
Feb b-11
Octt-10
Jun n-10
Feb b-10
Octt-09
Jun n-09
Feb b-09
Octt-08
2 Jun n-08
% (y/y)
26
0 Sales
Construction completed
Source: Standard Bank
0 Sales Construction completed
8
Tight monetary policy and lower intensity caps construction demand On the O th back b k off slower l sales l we expectt construction t ti growth th to t slow l rather than retreat. Given base effects from 2011, we therefore view our 7% growth estimate for new space under construction as neutral rather than bearish.
C Copper d denominated i t d in i CNY 80,000
CNY//mt
60,000
For every one square meter of new construction 0.8kg of refined copper is consumed. consumed However, However we find evidence that the intensity of copper use has declined, driven in part by substitution owing to higher raw material prices denominated in CNY, but also increased pressure on margins, given a lower property price environment.
40,000 20,000 0
Jan-12 2
Apr-11 1
Jul-10 0
Oct-09 9
Jan-09 9
Apr-08 8
Jul-07 7
Jan-06 6
Oct-06 6
Annual average
Copper usage per square meter has declined
4,500
1.20
Cu per ssq.m
1.60
1,500
Apr-05 5
3m CU price in CNY
6 000 6,000
3,000
Jul-04 4
We estimate floor space under construction in China will grow by 330 million sq.m in 2012
Oct-03 3
Jan-03 3
We estimate construction demand for copper will grow by 145K mt to 4,281K 4 281K mt in 2012. 2012
Sq.m (m million)
Notes
9
0.80 0.40
2008
2010
2011
2012F
Source: Standard Bank
Dec
2007
Nov
2006
Oct
Sep
Jul
Jun
May
Apr
Mar
Feb
Aug
0
2009
0.00 2008
2009
2010
2011
Cu per square meter of construction Avg. cu per square meter g p q Source: Standard Bank
Key indicators for Chinese demand
China retail sales growth
In order to get a monthly gauge as to whether China is set to deliver 6.6% 6 6% growth in actual refined copper consumption, a number of factors need to be looked at: •
Chinese exports: Exports volumes of white goods should grow by at least 1.4% y/y
•
Chinese retail sales – retail sales between 15% - 20% should implyy domestic white g goods sales will likely hit our target of 15%
20
China’s real estate sales: Given that it takes 9 months for sales to impact new construction, construction a continuous decline in real estate sales (12.1% y/y in Dec’11) bodes ill for copper demand going forward. The timing of any turning point therefore becomes vitally important.
•
New Yuan Loans – New Loans imply new sales. The massive cash injection in 2009 had a positive effect on sales (and new construction) in 2009 and 2010. An improvement on 2011 loan volumes would make us more optimistic in terms of copper demand as we head towards 2013. 2013
New Yuan Loans
90
28%
10,000
7,500
% (y/y)
14%
Yuan (mn)
60
21%
10
5
Real estate sales growth
New square meters under construction growth
15
Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11
Square meters under construction – new construction must expand by 7% y/y. Usually the start of the year shows a sharp jump in construction. If new square meters under construction does not expand by at least 10% y/y in March, we would be increasingly concerned about real copper consumption.
•
30
5,000
2,500 0
7%
Jul--11
Dec- 11
Feb--11
Sep- 10
Apr--10
Nov--09
Jun--09
Jan--09
2008
2009
2010
2011
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Jan
Sources: Standard Bank, CEIN, PBoC
2012F
Mar--08
2011
Aug- 08
2010
Oct--07
2009
May--07
2008
Jul--06
M Apr Mar A M May J Jun J l Aug Jul A S Sep O t Nov Oct N D Dec
Dec- 06
-30
0%
Feb
0
Feb--06
Month hly growth (y/y)
Retail sales (y//y)
•
25
2012
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11
Walter de Wet, CFA* [email protected] +44-20-31456821 Leon Westgate* Westgate [email protected] +44-20-31456822 21 February 2012
*Please refer to the disclaimer at the end of this document.
1
Summary The following slides provide an analytical framework to help track China’s refined copper consumption using available macro economic data. data Given that we believe China will be the main source of growth in refined copper consumption this year, we analyse the country’s copper demand by sector to determine where the risk to demand growth lies. Although we expect refined copper consumption by Europe and the US to decline in 2012, we still expect China’s refined copper consumption to grow 6.6% to 8,400K mt. In order to reach our 6.6% target we expect to see the following: (1) Chinese exports of goods containing copper grow by 1.2% y/y, (2) Chinese domestic demand for goods containing copper grow by 15% y/y and (3) square meters under construction grow another 7% y/y in China. Current monetary policy in China remains tight, with little sign of imminent easing. When monetary policy is finally relaxed, there will be a time lag between those measures and the real economic impact. In addition, this there is still significant economic and political uncertainty in Europe, delaying economic decisions not just in China but globally. In an environment where we have not yet seen substantial monetary easing within China, and policy risk in Europe remains large, we believe the risk to construction and goods containing copper lies to the downside. Furthermore, even if the PBoC starts to ease, just as in the tightening cycle, the majority of the easing will be felt with a substantial lag. As a result, we believe demand for copper is unlikely to be strong enough to see prices trade sustainably above $9,000/mt for most of this year. In fact, we continue to believe copper will average just $7,770/mt in 2012.
We still see the copper market in a small deficit in 2012 Notes
2
We expect global refined copper consumption to grow by 1.9% (or 377K mt) in 2012. Of this 1.9% growth, China will contribute 2.6%, the rest of Asia 0.27% and LatAm 0.1%. We expect Europe and the US to see -0.85% and -0.24% refined copper consumption respectively. Other regions, including Africa will add 0.05% to growth. Therefore we believe the main risk to copper prices continues to be with Chinese demand. As a result we analyse the sources of refined copper pp demand in China to better understand where those risks lie. Annual Global Supply/Demand Balance for Copper Thousands of tonnes
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012F
2013F
2014F
production Mine p Total Year-on-year % change
13,785 1.5%
14,607 6.0%
14,922 2.2%
14,990 0.5%
15,483 3.3%
15,527 0.3%
15,893 2.4%
16,015 0.8%
16,000 (0.1%)
16,380 2.4%
16,970 3.6%
17,631 3.9%
Refined production Africa North America Latin America Asia (ex. China) China Australasia Europe Total Year-on-year % change
454 2,074 3,608 3,489 1,836 484 3,309 15 254 15,254 (0.1%)
508 2,198 3,566 3,541 2,199 490 3,449 15 951 15,951 4.6%
513 2,162 3,549 3,831 2,600 469 3,533 16 657 16,657 4.4%
563 2,155 3,553 4,200 3,047 429 3,605 17 552 17,552 5.4%
673 2,157 3,586 4,254 3,499 442 3,431 18 042 18,042 2.8%
757 2,032 3,774 4,060 3,795 503 3,579 18 500 18,500 2.5%
943 1,806 3,942 3,969 4,051 446 3,442 18 599 18,599 0.5%
986 1,709 3,915 3,995 4,574 424 3,568 19 171 19,171 3.1%
920 1,640 3,880 3,940 5,214 455 3,600 19 649 19,649 2.5%
990 1,700 3,900 4,000 5,632 480 3,585 20 287 20,287 3.2%
1,100 1,730 3,970 4,141 6,026 490 3,660 21 117 21,117 4.1%
1,200 1,800 4,050 4,300 6,387 500 3,700 21 937 21,937 3.9%
Refined consumption North America Latin America Asia (ex. China) China Europe Others Total Year-on-year % change
2,900 494 4,216 3,097 4,754 332 15,793 2.8%
3,101 541 4,564 3,371 5,031 333 16,941 7.3%
2,967 552 4,522 3,540 4,814 355 16,750 (1.1%)
2,863 554 4,680 3,820 5,208 343 17,468 4.3%
2,993 542 4,892 4,525 4,890 378 18,220 4.3%
2,622 591 4,763 5,149 4,624 488 18,237 0.1%
2,400 508 4,525 6,980 3,569 349 18,331 0.5%
2,500 668 4,605 7,320 3,929 257 19,279 5.2%
2,490 640 4,635 7,900 4,008 300 19,973 3.6%
2,440 660 4,691 8,421 3,827 310 20,349 1.9%
2,484 693 4,784 9,095 3,835 347 21,239 4.4%
2,534 714 4,928 9,686 3,873 375 22,110 4.1%
(539)
(990)
(93)
84
(178)
263
268
(108)
(323)
(63)
(122)
(173)
Implied surplus (deficit)
Source: Standard Bank, MBR, CEIN
Copper demand by region - China still the most important growth centre China was the sole source of copper demand growth in 2009. While we expect growth from other regions in 2012, China should once again account for the majority of copper demand growth. We do not anticipate a repeat of the 2009 Chinese restocking of copper, unless the price is right. In 2009 copper averaged CNY34,800/mt. If the CNY appreciates by around 3% against the dollar this year, and given our USD copper forecast of $7,770/mt, we believe copper will average almost CNY50,000/mt in 2012. This price is not low enough to entice the sort of large scale restocking from China seen in 2009, in our opinion at least, particularly given tighter monetary policy.
Copper demand by region
Contribution to global copper consumption growth (%) 15
24,000
10
18,000
5
%
mt ('000)
Notes
3
12,000
0 6,000
-5 -10
2 2012
2 2011
2 2010
2 2009
2 2008
2 2007
2 2006
2 2005
2 2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2 2003
0
Others
North America
Latin America
North America
Latin America
Asia (ex. China)
Asia (ex. China)
China
Europe
China
Europe
Others
Source: Standard Bank, MBR
Source: Standard Bank
A breakdown of China apparent copper consumption – construction vs. trade We focus on 3 sectors in China – (1) the export sector, (2) the domestic consumption sector and (3) China’s construction sector. All three sectors in China are currently under pressure (relative to 2010 and early 2011). China’s growth rate of exports of goods and services has slowed from well above 20% y/y in Aug’11 to 13% y/y in Dec’11. Domestic monetary policy remains tight, capping domestic retail sales growth below 18% y/y since Mar’11. Furthermore, China’s construction sector is under pressure, with real estate sales declining from 26% y/y in Aug’11 to 12% in Dec’11. All three sectors are crucial for copper demand. Using Chinese trade and construction data, we estimate that construction accounts for around 55% of Chinese copper demand, domestic consumption for around 29% with exports adding around 16% to total demand. The impact of a Chinese slowdown in construction is therefore the decisive factor. With exports looking vulnerable to weaker demand from Europe, the burden falls on domestic consumption to fill any gap left behind from weaker construction demand.
Copper used in export , domestic and construction
China’s demand for refined copper 9,000
75%
6,750 mt ('000 0)
100%
0% 50%
4,500
25% 2,250
C Construction t ti
D Domestic ti non-construction t ti
Source: Standard Bank, MBR, CEIN
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
0% Nov-08
Notes
E Exports t
0 2008
2009
Domestic non-construction non construction Source: Standard Bank
2010 Exports
2011
2012F
Construction
4
Exports - 16% of Chinese copper consumption goes into export products
5
There is increasing concern over China’s C ’ exports in general, and the impact it may have on metal demand specifically. f
Notes
Of China’s total copper consumption, we estimate 16% (1,300K mt) is re-exported via products such as fridges, air conditioners, TV’s etc. Interestingly, the amount of copper consumed in export products has declined from 135K mt in June last year to 102K mt in December. We expect p copper pp demand from this sector to g grow byy onlyy 1.2% in 2012. This,, we estimate,, would add onlyy 17K mt to China’s copper demand. Most of the demand growth is likely to come from Asia. We estimate that around 250K mt of copper contained in products ends up in Europe, of which less than 15K mt goes to Germany (the sole engine of growth in Europe). Asia accounts for almost 640K mt while the US accounts for 230K mt. Copper used in exports (annual): the growth will come from Asia
Copper used in exports by destination (monthly): 20% of copper goes in exports to Europe
1,600
160
mt ('000)
1,200
80
40
800
400 0
Nov--08 Jan--09 Mar--09 May--09 Jul--09 Sep--09 Nov--09 Jan--10 Mar--10 May--10 Jul--10 Sep--10 Nov--10 Jan--11 Mar--11 May--11 Jul--11 Sep--11 Nov--11
mt ('000)
120
0 2008
Rest of the World Japan EU excl. Germany US Source: Standard Bank, CEIN, Bloomberg
Asia (excl. Japan) India Germany Monthly average
2009
2010
2011
Rest of the World
Asia (excl. Japan)
Japan
India
US
EU
Source: Standard Bank; OECD; World Bank
2012F
Domestic non-construction – This sector consumes 29% of Chinese copper Domestic non-construction demand is the natural counterbalance to falling demand from exports. We have seen strong growth, albeit from a low base, in this sector over the past few years. We expect this rate of demand growth to continue. Domestic consumption has risen steadily from around 150K mt copper consumed per month in domestic goods such as fridges, TV’s, and air-conditioners in 2008 to more than 221K mt in Dec’11. We estimate China consumed 2,414K mt of copper in domestic non-construction goods in 2011. We expect this to rise 15% in 2012 to 2,776K mt, despite tight monetary policy. We note that relative to export demand, domestic consumption has been the brightest spot by far. This should remain the case in coming years as China rebalances it’s economy and shifts towards higher domestic consumption. However, we do not believe that the domestic consumption sector is large enough to offset any potential decline in construction demand.
Domestic, non Domestic non-construction constr ction cons consumption mption more important than the export market
Copper used C d in i domestic d ti consumed d goods d has h been b rising steadily, approaching 2.3 million mt in 2011
4,800
400
300
3,600 mt ('000)
mt ('000)
200
2,400
100 1,200
Copper used in export products Domestic, non-construction Source: Standard Bank, CEIN, Bloomberg
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
0 Nov-08
Notes
0 2008
2009
2010
Domestic, non-construction non construction Source: Standard Bank
2011
2012F
Export prodcuts
6
Construction: The sector consumes 55% of Chinese copper
7
Chinese construction remains the main driver behind Chinese copper demand. This has been the key growth area over the past few years. We believe this sector should remain the dominant sector, despite the steady rise in domestic demand for goods containing copper.
Notes
After stabilising over H2:10 and into H1:11, Chinese property sales growth started to deteriorate in September 2011. We expect sales g growth to decline further during g the first half of 2012, mainlyy because of tight g domestic monetaryy policy, y but also due to would-be purchasers waiting for lower prices rather than panicking about missing the boat. We note that most of the growth in construction has come from the private sector, with government related property development making up only a small percent of total developments. Even in 2009 government-related construction was a small part of real estate construction. The private sector remains vulnerable to a lack of financing. Property development is private sector driven 4,800
60
3,600
Sq.m (million)
90
30
2,400
0
1,200
-30
0
Feb b-06 Jun-06 Occt-06 Feb b-07 Jun-07 Occt-07 Feb b-08 Jun-08 Occt-08 Feb b-09 Jun-09 Occt-09 Feb b-10 Jun-10 Occt-10 Feb b-11 Jun-11 Occt-11
% (y/yy)
Chinese property sales growth y/y
Source: Standard Bank, CEIN
2006 Pi Private
2007
2008
C ll i Collective
Source: Standard Bank, CEIN
2009
2010 S State owned d
2011
Construction: Chinese property sector still to impact on construction We estimate the lag between sales and new construction is 9 months. The current wobble will therefore be felt well into Q2:12. Also, as sales start to pick up again, new construction may take a while to respond to improved market conditions.
Notes
RRR cuts and signs of easing measures will be positive but will also take time to feed into sales and new construction. As a result we expect the growth in new floor space under construction to slow to around 6% y/y in August before starting to rise again g towards yyear-end. We note that the slowing growth rate of floor space under construction is a function of both base effects (due to a particularly strong 2011) and declining sales. Months lag before sales iimpactt on new construction t ti
Floor space under construction (annual comparison) – we still expect 9% growth y/y
New construction – elasticity to sales l and d existing i ti projects j t (%)
34
0.6
20
0.45
15
Months
%
18 0.3 3
10 0.15
12m MA - estimate 12m MA - actual Monthly growth rate - estimate Source: Standard Bank
10
5
Octt-12
Jun n-12
Feb b-12
Octt-11
Jun n-11
Feb b-11
Octt-10
Jun n-10
Feb b-10
Octt-09
Jun n-09
Feb b-09
Octt-08
2 Jun n-08
% (y/y)
26
0 Sales
Construction completed
Source: Standard Bank
0 Sales Construction completed
8
Tight monetary policy and lower intensity caps construction demand On the O th back b k off slower l sales l we expectt construction t ti growth th to t slow l rather than retreat. Given base effects from 2011, we therefore view our 7% growth estimate for new space under construction as neutral rather than bearish.
C Copper d denominated i t d in i CNY 80,000
CNY//mt
60,000
For every one square meter of new construction 0.8kg of refined copper is consumed. consumed However, However we find evidence that the intensity of copper use has declined, driven in part by substitution owing to higher raw material prices denominated in CNY, but also increased pressure on margins, given a lower property price environment.
40,000 20,000 0
Jan-12 2
Apr-11 1
Jul-10 0
Oct-09 9
Jan-09 9
Apr-08 8
Jul-07 7
Jan-06 6
Oct-06 6
Annual average
Copper usage per square meter has declined
4,500
1.20
Cu per ssq.m
1.60
1,500
Apr-05 5
3m CU price in CNY
6 000 6,000
3,000
Jul-04 4
We estimate floor space under construction in China will grow by 330 million sq.m in 2012
Oct-03 3
Jan-03 3
We estimate construction demand for copper will grow by 145K mt to 4,281K 4 281K mt in 2012. 2012
Sq.m (m million)
Notes
9
0.80 0.40
2008
2010
2011
2012F
Source: Standard Bank
Dec
2007
Nov
2006
Oct
Sep
Jul
Jun
May
Apr
Mar
Feb
Aug
0
2009
0.00 2008
2009
2010
2011
Cu per square meter of construction Avg. cu per square meter g p q Source: Standard Bank
Key indicators for Chinese demand
China retail sales growth
In order to get a monthly gauge as to whether China is set to deliver 6.6% 6 6% growth in actual refined copper consumption, a number of factors need to be looked at: •
Chinese exports: Exports volumes of white goods should grow by at least 1.4% y/y
•
Chinese retail sales – retail sales between 15% - 20% should implyy domestic white g goods sales will likely hit our target of 15%
20
China’s real estate sales: Given that it takes 9 months for sales to impact new construction, construction a continuous decline in real estate sales (12.1% y/y in Dec’11) bodes ill for copper demand going forward. The timing of any turning point therefore becomes vitally important.
•
New Yuan Loans – New Loans imply new sales. The massive cash injection in 2009 had a positive effect on sales (and new construction) in 2009 and 2010. An improvement on 2011 loan volumes would make us more optimistic in terms of copper demand as we head towards 2013. 2013
New Yuan Loans
90
28%
10,000
7,500
% (y/y)
14%
Yuan (mn)
60
21%
10
5
Real estate sales growth
New square meters under construction growth
15
Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11
Square meters under construction – new construction must expand by 7% y/y. Usually the start of the year shows a sharp jump in construction. If new square meters under construction does not expand by at least 10% y/y in March, we would be increasingly concerned about real copper consumption.
•
30
5,000
2,500 0
7%
Jul--11
Dec- 11
Feb--11
Sep- 10
Apr--10
Nov--09
Jun--09
Jan--09
2008
2009
2010
2011
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Jan
Sources: Standard Bank, CEIN, PBoC
2012F
Mar--08
2011
Aug- 08
2010
Oct--07
2009
May--07
2008
Jul--06
M Apr Mar A M May J Jun J l Aug Jul A S Sep O t Nov Oct N D Dec
Dec- 06
-30
0%
Feb
0
Feb--06
Month hly growth (y/y)
Retail sales (y//y)
•
25
2012
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