In this article, we present our chart of the week, which shows the relationship between movements in copper prices and changes in power grid investment in China.
As the chart above suggests, the year-on-year changes in power grid investment tend to lead the year-on-year changes in the LME copper price by around 18 months.
Usually, copper experts estimate it takes around 6 months for a change in power grid investment to produce an impact on actual demand for power cables and therefore copper prices. Our work shows that the spillover effects are being felt beyond 6 months because it takes longer for power grid investment to have an impact on the real economy and therefore on the copper consumption through not only the power sector (50% of copper demand) but other key sectors such as the property, home appliance, and transportation sectors.
What is exactly Chinese power grid investment?
Macquarie defines power grid as follows:
The power grid is comprised of two parts: power transmission and power distribution. The power transmission network connects power plants with power transforming substations as well as providing the connection between sub-stations.
In our classification, copper demand in power infrastructure mainly consists of copper usage in power generation and the power grid. Within power, 67% of copper is consumed as wire & cable in the power grid, 20% is used in power equipment and the remaining13% is consumed in power generation.
Returning to the relationship between copper prices and Chinese power grid investment, Chinese power grid investment growth bottomed out in January 2018 (-40% YoY according to our calculations based on NBS series) to 30% year on year in November 2018. Given the 18-month lag, it seems that the year-on-year change in LME copper price has bottomed out in May 2019 and we believe that this will continue.
This chart is therefore bullish for copper in the coming quarters, at least until February 2020, before the year-on-year change in the LME copper price begins to roll over again.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.