On 20 January 2015, I told Resource Speculator readers ‘Copper is likely to become the next iron ore. I foresee a massive price crash, which has only just started.’ At the time, I recommended selling all copper stocks.
Copper’s crashed by nearly 25% since then. It fell from US$2.60 to US$2.00 per pound. But if you think the nightmare is over, think again.
China accounts for nearly 40% of global copper demand, according to Wolf Street. While this used to be good news, it isn’t anymore.
See, the Chinese economy’s facing a major crash in the months ahead. As I’ll explain below, this should hit copper demand hard. Plus, let’s not forget, the world economy’s already contracted significantly — so it won’t pick up the slack.
You may have heard the term Dr Copper before. That’s because copper is widely considered to be the bellwether of the world economy. And it shows that conditions are likely to get worse, before they get better.
Not surprisingly, stock markets are worried. Already feeling the pressure, if they head lower in the months ahead, copper prices won’t look pretty. Especially if Chinese economic data doesn’t pick up.
In my view, it doesn’t look good for copper. Expect significantly lower prices in the short term. But longer term there’s no need to panic. Copper prices should skyrocket over the next two years. So what matters is when you buy…and what you buy.
Chinese social tensions to rise to new highs
Chinese investors don’t want to build. Property prices have crashed. And the economy’s still overleveraged. Being an investment-driven economy, expect the Chinese economy to slow more in the months ahead.
Chinese housing construction accounts for 61% of China’s copper demand. As the construction cycle takes roughly 18 to 24 months, most projects are nearing completion.
This doesn’t bode well for copper prices.
Not only that, but when the property is sold, it’s fitted with consumer appliances. This equates for roughly another 12% of Chinese copper consumption.
Vivek Dhar, a mining and energy commodities analyst at CBA, talks more about this story. He told Business Insider Australia:
‘With construction a strong driver of China’s commodity demand and tier 3 and 4 cities accounting for 80-90% of total new construction, we likely need to see prices supported in lower-tier cities to encourage commodity demand.
‘Given a property inventory overhang of two to five years in lower-tier cities and China NBS reporting the number of unsold new homes nationwide increased 14% to 437 million square metres as at 31 October, inventories are likely to remain a problem for China’s property sector.
‘With China still focusing on transitioning its economy towards consumption and services, we think construction and commodity demand will remain weak in 2016.
‘Although the property glut in smaller Chinese cities is not a new phenomenon – it has been in place for several years and has weighed on commodity demand, hence prices – it is showing little sign of dissipating.
‘Coupled with a continued uplift in commodity supply – partially in response to the huge surge in construction of past years that led to the glut today – it’s little wonder why so many remain downbeat on the prospects for commodity prices in the years ahead.’
Indeed, copper doesn’t look great in the short term.
Chinese authorities are feeling the pressure. As China’s economy declines, inequality is growing and social unrest is rising. To maintain employment and soften the economic blow, China’s increased defence spending to record levels.
Now, the rest of the world is worried…
Shots to be fired in the South China Sea
As you’re likely aware, the Chinese have claimed territory in the South China Sea. And this will have a large effect on the shape of the commodities markets in the future.
The Chinese have constructed artificial islands over some 3,000 acres. These islands overlay disputed waters, involving multiple sovereign claims. I should say, other countries have undertaken similar efforts. But Beijing’s project is by far the most ambitious.
Chinese neighbours are worried. They fear the Chinese are building military bases on the islands. This is something the Chinese deny. The alarm bells went off when satellite images showed a runway on Fiery Cross Reef last April.
Source: Sydney Morning Herald
The picture features a 10,000-foot airstrip. It’s long enough to accommodate fighter jets and surveillance aircraft. The airstrip was one-third complete when the picture was taken in April.
According to Today Online, Mr Peter Dutton called the project a ‘game changer’. He’s a Professor of strategic studies at the Naval War College. Professor Dutton said, ‘a landing strip for fighter and surveillance aircraft will vastly expand China’s zone of competition with the US in the South China Sea.’
Not surprisingly, the US doesn’t want any challengers. And tensions hit a new high between the two countries in October when the US sailed a warship into the region. It was referred to as the ‘freedom of navigation’ exercise.
In reality, Washington’s actions were a show of force. And the Chinese weren’t happy.
Fast forwarding to earlier this month, Beijing tested the runway for the first time. This drew sharp criticism. The area’s various claimants worry their freedom of navigation will be affected. Remember, when Washington flew a fighter jet over the region last year, it was told to go back.
Yet Beijing insists the airstrip is for civilian purposes. The Star Online reported Ian Story’s view. He’s a South China Sea expert at Singapore’s ISEAS Yusof Ishak Institute. Story said, ‘China will effectively establish a no-fly zone. As these facilities become operational, Chinese warnings to both military and civilian aircraft will become routine.’
The recent developments in the South China Sea are a strong signal — worse is yet to come.
Historically war is good for commodities
In the next two years, a war may develop in this region — especially if Washington becomes more aggressive. I want to make it clear. War isn’t something I want. In fact, I don’t think anyone wants war. Except, maybe certain politicians…
Let’s not forget, the Chinese economy’s facing a severe recession or even collapse. History shows, when economies crash, countries go to war.
When China’s ‘hard landing’ becomes obvious, their leaders may get restless. Unemployment will rise. And when people go hungry and lose everything, they get angry. The Chinese authorities don’t want to spark a revolution. So, if history’s correct, they’ll use war to distract the people.
And China is starting to prepare — even if it won’t admit it.
Bonnie Glaser, an expert on Chinese foreign and security policy at the US Center for Strategic and International Studies, sums it up best. Bonnie told the International Business Times:
‘The amount of money they have been putting into the military has been so substantial. The rate at which they have been producing ships for use in the South China Sea, for example, really demonstrates the ramping up of its capabilities and should dispel any belief that they are about to cut back.’
In the months ahead, I’d be surprised if more money isn’t poured into the artificial islands. This should mean more demand for commodities — especially copper.
Copper is, arguably, more important than any other metal when it comes to military applications. It’s a vital component in ammunition, ships, tanks, helicopters, rifles and thousands of other military supplies. It should outperform when global conflict heats up in the years ahead.
So, while copper is still likely to crash in the months ahead, it won’t stay low forever.
If you want to know when it will end and who the best miners digging copper up are, check out Resource Speculator.
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