Copper - Commentary

Copper has underperformed over the week, gaining only 0.16% as speculation that China may impose further measures to cool the property market tempered demand for the metal. The People's Daily newspaper in China has reported that Chinese property developers are beginning to struggle with cashflow problems. This comes at the same time that speculation is mounting that China will enforce higher capital-adequacy ratios, which would tighten lending conditions in China. Goldman Sachs is estimating that capital-adequacy ratios in China could reach 15% by 2012. At the moment the largest Chinese banks must meet a capital ratio of 11.5%. Advancements in China's economy carries a huge weight in driving copper prices, as China is estimated to consume around 40% of the world's copper production. Copper, which is used extensively in wiring of homes and buildings, tends to move in line with developments in the property and industrial sectors. The world's second largest consumer of copper is the US, but the growth outlook for the US remains soft, with industrial production declining to a meagre 0.2% this week while the US housing industry is still struggling to get back on firm footing. That means that investors have turned to emerging markets to take their cues for copper demand. Despite this week's underperformance, many analysts are still bullish on their outlook for copper, with the availability of large copper deposits dwindling and the costs of refining high-grade copper increasing. Investors seeking to take a position in copper should be mindful of the volatility in copper prices, particularly in the current environment where uncertainty is hampering any clear direction for the global economy.