Chinese Demand Pushes Copper Prices to Two-Week High

Copper price have quadrupled in the last five years on the back of demand from China, the world's fastest-growing major economy.

"Emerging markets consumed 36% of the world's copper in 1998," says Bill Bonner in the Daily Reckoning.

Now, they take up 59%. And zinc, too; emerging markets use 63% of the world’s output compared to 43% ten years ago. You can go down the list of commodities; the story is the same. The developed world has enough refrigerators and automobiles already. People just replace what they have. But in emerging markets… the scope for selling more appliances, houses, automobiles and the rest of the paraphernalia of modern life is wide open. In these countries, as soon as people get some money, they go out and buy a washing machine. And good for them. But it means that the market for the basic ingredients of the machine age is no longer controlled by Western consumers. And it means – for the first time ever – that even if Western economies go on the fritz, prices paid by Western households may still go up.

This is bad news for the average American household; it has so much debt it can’t afford an increase in energy prices. And it’s bad news for the industry that loaded the average American household up with debt. Since 2006, U.S. house prices are down 16%. That, of course, has thrown a lot of mortgaged-backed credits onto the trash heap. Banks and other financial institutions have already written off $350 billion of mortgage-backed loans. Another $300 billion or so in write-offs seems likely. But the whole U.S. banking system only has about $1.3 trillion in equity; so these amounts represent a considerable share of the banks’ total capital… and a big blow to the whole industry.

Naturally, banks and brokers have been rushing to bring in more money. And they’re scheduled to announce big dividend cuts this week, to preserve their cash. You’ll recall, dear reader, that when the finance sector went down last fall, many investors thought they saw an opportunity to get in on flagship firms such as MBIA and Citiqroup at bargain levels.

Alas, it didn’t work out. As we keep saying, when a bubble explodes… there is no way to get air back in. You can pump, but the air goes into a new sector.

"Copper benefited from some optimism generated by the unexpectedly strong US retail sales reported [last week]," says Doug Casey in Casey Research.

“With some positive economic data and some bullish insight into China’s likely demand following the tragic earthquake, plus disruptions in metal supply, the fundamentals seem tighter if anything,” said BaseMetals.Com analyst William Adams. “Indeed with lead and zinc now down heavily from their earlier trading levels some value does seem to be in these metals, as has been seen in nickel.”

Adams added that," We would not be surprised if these lower prices attract a mixture of bargain hunting and restocking."

Nickel prices retreated from a three-week high after the market reconsidered the potential for supply disruption because of BHP’s closure of an Australian smelter.

BHP reported it was hoping to export more nickel concentrates to other processing plants over the next four months, and that was enough to dampened interest. “Taking into account shipping delays, there will be a modest loss. Output will ultimately be pushed back from 2008 to 2009,” said David Thurtell, analyst at BNP Paribas.

“I suspect that with recent softness in demand … There will be plenty of spare refining capacity to take BHP’s material, but it depends on port capacity,” Thurtell added.

Meanwhile, lead’s extraordinary freefall, which has now driven the metal to a 16-month low, continued as stocks rose. Inventories monitored by the LME have grown by 70%, to 79,300 metric tons, since early March.

Some are beginning to question whether the selloff has been overdone.

“We expect prices to rebound to an average of $2,950/t in (the third quarter of 2008) on the expectation of a strong pick up in Chinese buying over the summer,” Barclays Capital analysts wrote. Lead closed at $1,775/t yesterday, a 54% plunge since its record high in October, 2007.