Chinese base metals demand surprised to the upside in 2013 which has important implications for demand growth in 2014, according to Barclays Capital.
Going into 2013, Barclays had been forecasting a slowdown in Chinese consumption growth due to "slower GDP and a change in its composition towards consumption and away from metals-consuming infrastructure."
"However, not only did demand surprise to the upside, but the pace of demand growth actually sped up," the bank said, adding that demand for copper and aluminum was almost twice as strong as expected.
Barclays estimates that copper consumption increased 12% in 2013 due to stronger than expected grid investment and scrap substitution. Spending on the power grid accounts for 40% of Chinese demand and state grid spending was five times higher than the official target last year. At the same time, limited scrap supply boosted refined copper consumption in China, "as consumers substituted scrap for cathode," the bank said.
The stronger demand also means market balances were tighter.
The bank expects Chinese demand growth to remain strong in 2014.
"Even with slower Chinese growth forecast for 2014, we expect global consumption to be strong, since the additional quantities China will add are now greater than when it was growing rapidly from a smaller base," the bank said.
In addition, China's is planning to increase grid spending by 13% this year, which "suggests that 40% of copper consumption will be growing faster than the economy in 2014."
Copper closed Friday at US$3.284/lb cash on the London Metal Exchange, down from the previous day's US$3.304/lb as sentiment soured after weak preliminary Chinese PMI data sparked concerns over the strength of Chinese economic growth.