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Commodities slump as China decelerates

HITTING THE BREAKS The drop in Chinese demand has led to copper projects in Latin America being shelved and the world’s largest iron ore producer to cut production

AFP , SHANGHAI

A worker inspects newly smelted copper anode sheets for delivery at the Shanghai Dachang Copper Industry Co refinery in Shanghai on Nov. 23, 2005.

PHOTO: AFP

When China hits the brakes, commodities exporters half a world away have to shift to a lower gear, as the rapidly deteriorating fortunes of the copper sector shows.

The global financial crisis has impacted China’s copper-wired construction industry, machine makers and electric appliance producers at an amazing speed, with demand at home and abroad crumbling abruptly.

Just as precipitously, China, the world’s largest consumer of copper, has passed on the misery to countries like Chile, its largest copper supplier.

Chile’s mines have cut production and laid off workers, leading to violent strikes in some parts of the country.

“Business has fallen off a cliff,” Simon Hunt, an independent UK-based analyst, said after recent visits to Chinese and other Asian copper firms.

About 30 percent of China’s copper consumption goes into exports, Hunt said.

“The impact of these [global] developments on China’s economy and its copper consumption will be dynamic,” he said.

World copper prices have more than halved to less than US$1.50 a pound (453g) after record highs of US$4 in July, as China’s once-ravenous hunger for commodities has slowed and weakening demand abroad has hurt exporters.

“As late as July, clients were calling, looking for assurance that China’s copper demand would maintain strong growth,” said Shi Lin, an analyst with British metal consultancy CRU. “Now everyone sees what happened.”

“Growth in China’s copper consumption accounted for 80 percent of the world’s overall growth. It’s no surprise copper prices were impacted so much by weakening Chinese demand,” he said.

China’s economic growth slowed to 9 percent in the third quarter, the lowest level in five years, and the World Bank has predicted it will go down to 7.5 percent next year — a 19-year low.

Copper has been a key raw material in China’s economic boom, and it consumes a quarter of the world’s supply, importing about 80 percent of its needs. Chile provides a third of China’s total demand.

The drop in Chinese demand has led to copper projects in the South American country, such as Canada-based Quadra Mining’s Sierra Gorda project, being shelved.

Commodities such as zinc, nickel, iron ore, and aluminum, too, have seen their prices plummet.

Anglo-Australian miner Rio Tinto said last month it slashed iron ore output at its Western Australia plants by 10 percent following a drop in demand from China. The company said on Wednesday it would cut thousands of jobs globally.

The world’s largest iron ore producer, Brazil’s Vale — whose principal market is China — also slashed production.

Next year’s contract iron ore prices are expected to decline 35 percent as China’s steel sector suffers an industry-wide loss following a fall in steel prices, according to China International Capital Corp (中國國際金融公司).

Economists suggested demand for raw materials in China was not only dented by slowing industrial production, but expectations of prices falling even further, suggesting the worst may be yet to come.

For example, copper will likely follow the economy. Australia’s Macquarie Bank expects Chinese demand to slow to between 6 and 7 percent growth, at 5.1 million tonnes for this year, compared to nearly 18 percent in last year.

It could fall to between 4 percent and 5 percent next year, said Bonnie Liu (劉博雅), a Shanghai-based analyst with Macquarie.

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