Home > Market change > Copper Falls as China Moves to Tame Inflation

Copper Falls as China Moves to Tame Inflation

March 18, 2011

“Copper fell on the London Metal Exchange Friday on renewed fears that continued measures to curb inflation in China will ultimately curtail demand for industrial metals. Investors were reacting to a move by the People’s Bank of China to raise the reserve-requirement ratio for banks for the third time this year, by 0.5 percentage point, in a bid to tame inflation. China is the world’s largest consumer of base metals, and attempts to slow inflation could affect development and the demand for metals.

Other base metals, however, were trading higher, supported by a further weakness in the U.S. dollar. Interest in the dollar-denominated metals often rises as the greenback weakens, as it makes them cheaper to other currency holders.”

Source: Wall Street Journal, March 18 2011

Observations:

  • China’s central Bank, the People’s Bank of China, is increasing the reserve ratio for banks in an attempt to make banks hoard more cash and lend less, thus curtailing consumption and inflation. China’s government and banking system are in a continuous struggle to adjust currency rate, interest rates and other financial parameters to stabilize growth around 8-10%.
  • Copper is going through a period of unstable prices as there is a production shortage, many new large scale projects are under development, and high prices trigger a wave of industry consolidation.

Implications:

  • Wall Street Journal’s conclusion that the lower copper price is caused by China’s reserve rate increase might be a bit farfetched, as this increase should have the same effect on other commodities. The increase in the reserve rates does however give a signal that China is still struggling with controlling growth, as discussed in the ‘Red Wave’ industry scenario for the mining industry presented last week.
  • A large part of copper production takes place in areas were the currency is pegged, strongly linked, or correlated to the dollar. As a result the copper price is relatively insensitive to changes in the strength of the dollar.

©2011 | Wilfred Visser | thebusinessofmining.com

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