Eoin Treacy's view

I had dinner last night with a project manager from the International Copper Association Asia who has first-hand knowledge of the sector in China. I thought subscribers might be interested in what he had to say. 

Unlike most developed countries China continues to favour aluminium as a conductor of electricity so there is direct competition between copper and aluminium in this sector. 
China imports about 50% of its requirement for both metals but favours aluminium in terms of subsidies because it is such a large employer. In many respects one would expect aluminium and steel to compete for market share because of their use in construction. China has large numbers of people employed and overcapacity in both sectors but has been delaying making any meaningful decisions about rationalisation because of the unemployment this would cause. 

A contributory factor to copper’s relative strength has been the fact that China has been willing to favour aluminium production at the expense of copper which has contained supply growth. 

Copper broke below $3 in November but has not deteriorated to the same extent as some of the other commodities. Nevertheless, a sustained move above $3.10 would be required to signal a downside failure. 

Aluminium rallied for much of the first half of the year and has been largely rangebound since. It has returned to test the area of the trend mean over the last couple of weeks and will need to find support in the current area if the benefit of the doubt is to be given to potential for continued higher to lateral ranging. 

An additional remark he made was that many Chinese buyers look on a multiple of 3 of copper relative to aluminium as the breakeven for substitution. The ratio has been trading above that level since 2009 but recently returned to retest it.