China’s copper anxiety and the Glencore-Xstrata delay
FORTUNE — Big things are going on in Switzerland. The products involved may not tug at consumer heartstrings like a Coke or an iPad, but they’re essential, and some are very shiny. Swiss commodities giant Glencore and Swiss mining company Xstrata are on the verge of a multibillion dollar merger that would give both access to massive mineral wealth and other raw materials worldwide.
Though the merger was first announced in 2011, the companies said Tuesday that they are extending the deadline to complete the deal to April 16. The companies need extra time because the Chinese government is reviewing how the deal could potentially affect its copper market. According to the
Wall Street Journal
, Glencore CEO Ivan Glasenberg says he believes that Chinese officials will ultimately accept the deal, the last step in a lengthy international approval process.
Then why the hold up?
For one, China is tuned into copper because it is the world’s top consumer of the metal. The country accounts for 40% of copper’s global demand, according to the International Copper Study Group’s report issued late 2012. That demand will hold as China continues to industrialize, says Glenn Ives, mining expert and chair of Deloitte Canada. “If you’re taking a rural population and urbanizing them, one of the things you do is provide them with electricity,” he says, which requires plenty of copper wiring.
China needs copper in ways that more mature markets don’t. To add to the crunch, while there are plenty of copper reserves worldwide, there may not be enough mines producing the metal to meet China’s future demand, Ives says.
The market for copper is relatively tight. Unlike gold, which is susceptible to bubbles, copper supply and demand are just about even. That means that the market could become volatile quickly if, for example, a small number of mines can’t meet demand. For investors, that could lead to higher commodity prices. But for China, it would translate into a major shortage of a much-needed metal.
China’s delay of the Glencore-Xstrata deal highlights one of many potential operational issues when working in the country. China, right now, needs a different mix of commodities, in this case metals, than developed countries. Accordingly, the government will take its time to scrutinize any deal that could alter its supply. Companies like Glencore and Xstrata must cater to that careful review process, since China will be one of the most important consumers of commodities for the foreseeable future.
For Chinese leaders, delaying the deal is likely part of an attempt to prevent a lull in supply that could stunt economic growth. “I actually think the deep-rooted concern in China is that there may be a time that they just cannot get commodities in general,” Ives says.