The rally in the copper price won’t last

Chinese demand for copper won't be enough to keep the price rising.

Copper has bounced by 10% to $7,300 a tonne after falling to a near-two-year low last summer. But don't expect this to last. The latest uptick was based on supply disruptions at smelters and a surprisingly sharp drop in stockpiles amid healthy demand in China, which accounts for 40% of total demand.

But there is less to China's appetite for the red metal than meets the eye, as Capital Economics points out.

Not all the copper was used to build infrastructure. Some was used to build up long-term inventories, while some copper purchases took place as part of financing deals.

In recent years, Chinese firms have borrowed US dollars at low interest rates in order to import copper, and then used the metal as collateral in the domestic market to circumvent restrictions on credit. But now overall demand is set to ebb.

The Chinese government is clamping down on financing deals and is tightening the credit taps again; witness the weaker recent macroeconomic data. On the supply side, production should increase by 5.5% in 2014 after a 3.9% rise last year, according to the International Copper Study Group.

With an expanding supply surplus, prices are likely to fall back in the next few months. BNP Paribas is pencilling in an average price of $6,675 a tonne this year.

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