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Commodities eye

China's weak demand for nonferrous metals set to continue

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Weak Chinese demand for copper and other nonferrous metals is causing headaches for the London Metal Exchange.   © Reuters

TOKYO -- China's economic woes continue to weigh on the markets for copper and other nonferrous metals.

     A senior executive of Hong Kong Exchanges and Clearing, better known as HKEx, reportedly said he is worried about the London Metal Exchange during a dinner party that was a part of LME Week, a gathering of the nonferrous metals industry held every October in London. Among the attendants was HKEx CEO Charles Li Xiaojia, who explained the Hong Kong bourse's future projects and how it plans to strengthen ties with the LME.

     HKEx is the LME's parent company, having acquired it in 2012 for 1.39 billion pounds (around $2.16 billion at the time). At the time, this purchase value was 180 times more than the LME's profit. HKEx nonetheless expected that the deal would offer mutual benefits. As of the January-September period this year, however, the total trading volume for all commodities listed on the LME was down 3% year-on-year to 128.81 million lots.

     The acquisition has not yet proved as effective as expected, said a nonferrous metals broker. This view is widely shared.

     The LME's struggle is largely due to a worsening management environment. Trading in listed nonferrous metals, including copper, aluminum, zinc and nickel, is influenced greatly by consumption in China, the world's largest consumer of these items. If actual demand is strong in China, mining and resources trading companies that export to the country become more active in hedge selling on the LME. But actual demand from China is weak due to economic slowdown and a delay in public investments. The International Copper Study Group forecasts that copper consumption in China will decline 0.5% on the year to 14.42 million tons for 2015. If so, trading on the LME will also decline.

Uncertain directions

This slowing demand in China is attributed mainly to problems of excess real estate inventories and a facility glut. Copper in particular has far more facilities for electric wire rod processing than currently required, according to Pan Pacific Copper, a Tokyo-based company. China's electric wire rod processing industry is believed to have an annual production capacity of 15 million tons, including facilities at major state-run copper smelters. This is just over twice the nation's electric wire rod consumption. As such, banks are said to be reluctant to finance electric wire rod manufacturers, and demand for copper is flat.

     The Chinese government has been working to transition from an investment-led economy to a consumption-led economy. Growth in the use of copper is expected for consumption-related applications, such as for hybrid cars and consumer electronics, rather than in real estate- and infrastructure-related applications, which have previously driven demand. There are also expectations that copper consumption will grow in the renewable energy field, including wind power generation. However, the use of copper in these applications will take time to grow, and, as U.S. investment bank Goldman Sachs Group notes, copper may be replaced by aluminum in some of these applications.

     The price of copper on the LME fell to its lowest level in about six years in August, at $4,800 per ton, and has remained low since. Although resources companies have cut production, the price is not yet showing significant signs of bottoming out, since demand in China remains uncertain.

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