We have conducted extensive analysis on the key drivers of demand from the major copper consuming countries. As expected, copper demand has broadly been tied most closely to emerging market construction and infrastructure investment and global industrial production, with some variation of key drivers by country (see Exhibit 5). As discussed in detail below, we have used these historical relationships to reassess our view on demand over the next five quarters and on net are expecting global copper demand growth of 6.8% yoy in 2010 and 6.1% yoy in 2011. It is important to emphasize that these demand estimates are, if anything, conservative, in our view. China is clearly the major growth driver, but while Goldman Sachs maintains above-consensus forecasts for Chinese GDP growth, we are forecasting below the 10-year CAGR for copper consumption growth, primarily due to waning stimulus and consumption trend-reversion as much of the nonconstruction demand slows from levels pulled forward from stimulus. Further, we are embedding nearly flat demand growth from the US, Japan and South Korea, leaving overall world ex-China demand still well below pre-recession levels. Thus, while macro deterioration presents downside risk to this demand outlook, we believe that risks to our demand forecasts are skewed to the upside.

Eoin Treacy's view China remains the heavyweight in terms of commodity consumption growth but India and increasingly Brazil are pushing ahead with major infrastructure projects which will help to further fuel demand for industrial resources over the medium to longer term. Copper has posted a progression of higher reaction lows since June and continues to push steadily back towards the highs near $4. Reactions within the five-month uptrend have been limited to around 20¢ so a larger pullback than that would be required to question scope for further upside.

As consumption of industrials resources increases this should also be a net positive for oil consumption. Recent price action suggests that demand may be beginning to regain the upper hand after a more than yearlong hiatus. Oil has rallied impressively over the last couple of weeks but is overbought in the very short-term. Provided it can hold above, or in the region of, $80 the upside can continue to be given the benefit of the doubt.