Emerging Markets Driving Cu DemandEmerging Markets: The Driving Force Behind Copper’s Rally
By Leia Michele Toovey-Exclusive to Copper Investing News
Thereis a fundamental shift underlying the copper market’s demand dynamics.The United States is losing ground in terms of copper demand, whereasthe demand from the emerging markets is skyrocketing.
Historically, the U.S. consumer has been the driver of global demand.While this is still the case, by 2017 the Chinese consumer is expectedto overtake the U.S. consumer and become the main driver of globalgrowth. This fundamental shift, however, required the involvement ofmore countries other than just China and it is currently being observedin the emerging markets across the globe. Emerging markets are nationswith social or business activity in the process ofrapid growth and industrialization. These nations vary according towhich analysts you ask, however, they generally include the BRICcountries and countries in Eastern Europe, the Middle East, and SouthAmerica.
It was not too long ago that many believed that without a growingU.S. economy, the entire global economy would stagnate. Copper’srecovery from the 2008 recession elicited how strong of an influencethese emerging markets have on the commodities sector. Many analystscalled copper’s rebound a “China only story,” because while the U.S. wasgrappling with policy adjustments to boost the ailing domestic economy,China embarked on an aggressive stockpiling program. China’s purchasesof copper, coupled with the moth- balled mining operations, sent thecopper market into a supply deficit and copper prices to record highs.
About 56 percent of copper is currently consumed in emerging markets,according to Walter de Wet, head of commodity research for Standard Bank-Corporateand Investment Banking. Strong demand in emerging markets andespecially China is driving pricing. This is not a new trend. In fact,growing emerging market demand was a story maker long before therecession. According to HSBC analysts, between the years 2000-04, thecompound annual growth in copper consumption from North America fell by 3percent, in Western Europe by 1.8 percent, and 2 percent in Japan. Incontrast, demand from Asian countries other than Japan has increased by8.6 percent each year. Demand from China grew a staggering 15 percent.
Arguably, analysts are most consistent in their bullish viewfor copper than for any other base metal. Few analysts seem to disagreewith the basic picture of strong demand – largely emergingmarket-driven and constrained supply will continue to push up prices.
According to John Robinson, chairman of Global Mining Investments,copper prices will continue to rise, beyond the recent highs. Miningcompanies have largely cited demand from China and other emergingeconomies for strong profit growth. “So far the demand side has beenpretty much driven by China, but now we are starting to see some pick-upin economic activity in the more developed economies,” Robinson said.“What we expect over the next five years is to see growth (incommodities) from those areas, as well as ongoing growth in thedeveloping markets.”
Why do emerging markets need so much copper?
As the emerging markets grow, they have to develop theirinfrastructure. The growth of the emerging markets involves a change ofeconomy stage, most commonly a migration of people from a rural(commonly farming) to an urban existence. Rural economies use littlecopper, urban economies use copper in houses, plumbing, wiring, roads,cars and appliances. The transition from rural- urban requires a greatdeal of copper.
What about substitution?
As the price of a commodity rises, and some point, market participants start to consider substitution. Economists study the elasticity of demandto determine at what price point consumers shift their purchases fromone good to another. If a good has “inelastic demand” or “low priceelasticity of demand” then consumers are relatively irresponsive tochanges in price. If a good has a high elasticity of demand then as theprice goes up, consumers readily substitute another good. Copper is anexample of a good that has a low price elasticity of demand, due to thefact that there is a lack of close substitutes in the market. For someproducts and processes, aluminum or plastic may act as a substitute tocopper; however, there are costs and delays involved in switchingbetween to the substitute goods. The elasticity of supply is also low.Supply is usually unresponsive to price movements in the short termbecause of the high fixed costs and lengthy start-up times involved inof developing new mines and smelters. If existing copper miningbusinesses are working close to their current capacity then a rise inworld demand will simple lead to a reduction in available stocks. And asstocks fall, buyers in the market will bid up the price either tofinance immediate delivery (the spot price) or to guarantee delivery ofcopper in the future. It can take huge price swings in the market forsupply and demand to respond sufficient to bring the market back to somesort of equilibrium.
The future
From a supply and demand perspective, the price of copper can beclosely tied to the development activities of emerging market economies.Manufacturing increases or slowdowns in these economic regions can beleading indicators of the direction of copper prices or vice versa.While the emerging markets are subject to a great deal of volatility,many analysts like the long-term. Bill Rocco, senior analyst at Morningstar,says investors should be looking out between 10 to 30 years in emergingmarkets, not short term, and should expect significant ups and downsalong the way.