“The data so far from China in 2012 has been a major disappointment for the global economy.
One thought we had was that the typical January-February Lunar New Year slowdown was exaggerated thanks to it being the Year Of The Dragon, and that because of that the rebound would come harder/sooner than people expected.
But so far that theory isn’t being born out.
Barclays analyst Gayle Berry recently visited China, and met with various industrial firms, and came back with some grim news: Things are weak, and it’s not just a matter of the Lunar New Year.
Here is our summary of Berry’s key points:
- Demand for copper in China remains weak, and the outlook for the rest of the year doesn’t look so great.
- Some manufacturers cranked up production in January/February in anticipation of a rebound in Q2, but “demand has been softer than they expected.”
- Appliance demand is weak thanks to slow construction and poor real estate sales.
- Copper inventories are rising.
Bottom line:
Overall, we believe Chinese demand in the short term is likely to disappoint before beginning on a recovery trajectory later in Q2. Subsequently, we think that imports will weaken until bonded stocks are run down to more normal levels, possibly in Q3 12. With the market already expecting a drop in Chinese imports, we doubt this alone would have a significant negative impact on LME prices. That’s more likely to be determined by the market’s evaluation of how long imports will weaken for and whether it’s the result of short-term dislocation or longer lasting core weakness. The LME backwardation meanwhile is likely to continue unless Chinese exports are big enough to begin offsetting the draws in LME inventories, in our view.
So there you go.”
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