CHINA January 27 2014 12:05 PM
BEIJING (Scrap Register): In contrast to Barclays initial forecasts for slower Chinese base metals demand growth in 2013, data out last week show that it actually sped up, and for copper and aluminum was almost twice as strong as expected.
Even with slower Chinese growth forecast for 2014, Barclays expects global consumption to be strong, since the additional quantities China will add are now greater than when it was growing rapidly from a smaller base.
According to Barclays, going into 2013, we had been forecasting a slowdown in Chinese consumption growth on the assumption that slower GDP and a change in its composition towards consumption and away from metals-consuming infrastructure would weigh on demand growth. However, not only did demand surprise to the upside, but the pace of demand growth actually sped up.
Subsequently, global metals demand growth was much stronger than expected and market balances were tighter. This is important because of the implications it has for demand growth in 2014. Even if Chinese demand growth slows this year, as Barclays expects, global demand for base metals is likely to stay strong.
That is because China’s growth is now coming from a much larger base, so even with slower growth, the additional quantities it is adding to global demand are now greater than when it was accelerating rapidly during the previous decade. Because it has now achieved critical mass, so long as China’s demand growth remains above that of the global average, it is additive to global demand growth rates (and quantities), even if its own growth rates are slowing.
Chinese copper production in 2013 was in line with Barclays January 2013 forecast of 14% y/y growth. However, Barclays final estimate of refined production (6.5Mt) is lower than the reported total (6.9Mt) as we have for some time been adjusting lower the monthly reported data to account for over-reporting.
Consumption, however, was much stronger than we initially forecast. Even after adjusting for changes in stocks on the SHFE, bonded and unreported we estimate that consumption increased 12% y/y in 2013. This is double our January 2013 forecast of 6%. Stronger-than-planned grid investment spending and scrap substitution were the two main factors for this outperformance. The power grid is the single largest consumer of copper in China (accounting for 40% of Chinese demand) and state grid spending was five times stronger than the government’s target, they continued.
On top of that, limited scrap supply resulted in a positive boost to refined copper consumption in China, in our view, as consumers substituted scrap for cathode. We estimate that boosted refined copper consumption in China up to 500Kt. We expect Chinese demand growth to stay strong in 2014. Whether scrap continues to boost refined consumption will depend on whether scrap generation outpaces growth in underlying demand.
The recovery in global industrial activity will certainly help to boost scrap generation, though we think it is unlikely to match underlying demand growth for a while yet. Meanwhile, China’s targeted growth in state grid spending of 13% this year suggests that 40% of copper consumption will be growing faster than the economy in 2014.
Chinese aluminum production growth stayed strong in 2013, driven by the ramping up of production in lower cost provinces such as Xinjiang. Reported production rose 12% y/y, to 22Mt, which was in line with our forecast for 12% growth. As with copper, however, demand significantly outperformed our initial forecast of 9% growth, to end the year 15% higher.
The stronger grid spending played a part, though is far less significant for aluminum than copper. Transport and consumer goods, which account for over 30% of Chinese aluminum demand, grew at double-digit rates, which was a boon for aluminum demand. We do, however, see some potential for demand growth to slow from 2013’s high to 8% this year, Barclays concluded.