Copper Commentary - 1/27/2023

Chinese consumers hold 17.8RMB in savings (~$2.6 trillion), up from 9.9RMB in 2021. The implications of deposit growth are less significant in China than they were in the U.S., however. Final consumption expenditures as a percent of GDP at 54.3% is low compared to the U.S. at 82.6%. Simply put, China relies on its role as the world’s manufacturing hub and the associated investment to generate economic growth. Nevertheless, household consumption per capita slowing to 2.4% in Q4 (from 5.5% in Q3) does bode well for a reacceleration from a low base. More concerning are wage dynamics in China and what those wage trends imply about business confidence as well as overall economic health. According to the European Union Chamber of Commerce in China, 60% of European companies reported that business has become more difficult in China (up from 47% in 2021). According to Goldman Sachs, wage growth in Q4 decelerated to 2.9%, compared to levels above 4% pre-Covid (the 3yr average is estimated at 3.2 in Q4). According to Rhodium Group, inbound M&A to China also decreased from $60bn/annum in the 2015 – 2019 period to $15bn in H1 of 2022. Understanding how bad business conditions have been helps us frame the outlook. While the return may be gradual, easy base comparisons bode well for upside surprises. Coupled with incrementally higher exploration budgets but lousy discovery trends, copper demand should shift higher. More concerning in the economic context, the Conference Board’s U.S. Leading Economic Indicator fell by 1.0% in December, cumulatively down 4.2% over the last 6 months. As a result, consumer health by mid-2023 will largely be driven by the degree to which inflation will slow and therefore generate real wage gains in the quarters ahead.