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How Chinese Copper Demand Could Play Out in 2017

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Jan. 10 2017, Updated 10:41 p.m. ET

Chinese copper demand

Chinese copper demand was better than expected in 2016 due to the stimulus provided by the government. However, there are concerns about the sustainability of China’s copper demand growth rates as we head into 2017.

Some Chinese cities tightened home-buying rules to prevent overheating in the property market, which could have an impact on the country’s real estate market. It could also hurt copper demand. As we noted previously, miners like BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) rely heavily on Chinese demand (FXI).

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Car sales rose in 2016

China’s passenger car sales have witnessed double-digit year-over-year growth for seven consecutive months. On September 30, 2015, China reduced the sales tax for cars with engines smaller than 1.6 liters to 5% from the previous rate of 10%. The move boosted China’s car sales in 2016.

Growth rates could moderate

China raised the purchase tax to 7.5% effective January 1, 2017, and it plans to restore the tax rate to 10% beginning in 2018. In our view, even with the tax break extension, albeit at a lower rate, China’s car sales might not see a major expansion in 2017.

The reasoning behind this is two-fold. Firstly, higher sales growth in 2016 came from a relatively low base year. Secondly, the tax incentive scheme has been in place for more than a year. Some prospective car buyers might have pushed their purchases up in order to take advantage of this tax break.

Société Générale SA noted on December 29, 2016, “China is poised to abandon its 6.5 percent growth target sometime in the next two years as leaders push to contain asset bubbles and financial leverage.”

The slowdown in China’s growth rate could subdue copper prices (FCX). Meanwhile, expectations of a supply deficit could also support copper prices in 2017. We’ll discuss this more in the next article.

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