Building on Rory's discussion of China's investment in Rio Tinto, it's worth noting that China's most recent move to develop a stake in the international copper market goes back to early 2006, when demand for copper in China far exceeded growth in the industry. By March of that year, investments in copper smelting and the production of copper-based value added products like wires and cables seemed like a safe bet. According to some estimates, demand for copper grew by nearly 87 percent between 2001 and 2006.If you were reading government publications, you might have thought otherwise. Just months before, in late 2005, five government ministries came together to publish "Proposals on Curbing Blind Investment in the Copper Smelting Industry," citing worries about the stability of copper prices, international copper supply, the environment, and the financial risks linked to loans for new smelting facilities. But news of these worries did not seem to hit mainstream media until August 2006, nearly a year later.
The most recent decline in commodity prices has kept these same copper smelting facilities and copper dependent industries on edge - over the course of 2008, growth in the industry dropped to less than 3 %. In December, Mineweb offered some interesting observations that bode poorly for copper's future. For one, they agreed with many economists that growth in China will no longer be in the double digit percentage range. And while "infrastructure counts for some 40% of copper consumption with the bulk being for power cables," the demand for copper is likely to fall proportionately with growth in the economy. Looking closer, "factory closures, leading to workers seeking new jobs, fits labor intensive infrastructure projects like roads, railways, bridges etc. rather than unwanted electricity generating and distribution capacity." On top of this, many power supply companies canceled orders for copper cables and some provinces have even begun using aluminum for cheaper medium voltage cables.
As the force of the economic crisis become a reality, China stepped forward to make a significant effort that may save the chunk of its economy leveraged by the copper industry. This effort began in January 2009 when China released a stimulus package aimed at infrastructure projects that will inevitably require copper wire and cable. Just a few weeks after this, they bought a huge stake of copper options with the hope of maintaining a supply of cheap unrefined copper. This has become a high profile campaign, but the stakes of unemployment and economic collapse in China is a high profile game that government cannot afford to lose.
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