Copper projections showing strengthening demand

As I said in Dividend Investors: Don’t Worry About Europe, Keep an Eye on China, investors should not let Europe’s woes overshadow increasingly favorable developments in China. Chinese copper demand should expand in the second half of 2012, as the country’s aggressive measures to stimulate its economy raise consumption of the metal.

Now that China’s leaders have tamed inflation fears, they can focus once again on the country’s still immense needs for infrastructure, including ports and shipping facilities.

Infrastructure currently represents about 20 percent of China’s total fixed asset investment and the government is getting ready to fire up spending even more. This fiscal stimulus will revive demand for a range of raw materials needed to build and maintain facilities. This demand dropped over the past year but is still strongly positive.

Growth in Chinese demand for electricity, for example, accelerated in May from April and will apparently grow again this month. Output of “long steel” products rose a solid 8 percent in the first quarter of 2012 versus year earlier levels, despite the government’s effort to control growth.

How important is China to global demand for natural resources? That depends on the commodity. But there’s no doubt of its overwhelming dominance of the global market for copper, in large part because of mushrooming demand for electricity as part of urbanization.

The country’s copper consumption expanded at a 10.1 percent annual rate from 1980 through 2010, exploding to a 40 percent plus share of total global demand. That’s up from barely 6 percent as recently as 2002. In fact, China’s copper usage is more than 10 percent greater than consumption in Europe, the US and Japan combined.

Copper prices are currently down about 25 percent from early 2011 highs, largely on concerns Chinese copper demand will shrink over the next year. That’s at least partly based on the drop in a widely watched measure of Chinese industrial activity. But it’s gainsaid by reports from major exporters such as Chile’s state-owned Codelco, which ships 53 percent of its output to the world’s most populous nation and expects copper exports to be at least 5 percent to 6 percent greater this year than in 2011.

Assuming Chinese demand rises only that fast, it would consume an additional amount of copper sufficient to offset a 15 percent decline in European demand. It would also offset a more than 25 percent drop in US demand. Since such extreme drops in demand elsewhere are unlikely, the upshot is Chinese demand growth will power another year of rising usage, and a recovery in copper’s price.

Source: Freeport McMoRan

Teck Resources (TSX: TCK/A, NYSE: TCK) has also made a major bet on copper. During the company’s first-quarter conference call last month, CEO Donald Lindsay stated its copper business “has the highest growth potential over the next five to seven years,” rather than its Canada-leading metallurgical coal and zinc businesses.

Teck expects to ramp up its copper output to better than 400,000 tonnes a year in the second half of 2012, from a rate of just 322,000 tonnes last year. Despite this promise, the stock is down nearly 18 percent this year, opening up a value investing opportunity.