Tano Capital Research: Copper Supply and Demand

MINED COPPER FLOW

COPPER USES

New copper applications being developed: antimicrobial copper touch surfaces, lead‐free brass plumbing, high tech copper wire, and heat exchangers. Also, potential extension of copper use in electric/battery-powered vehicles, copper wiring for digital transmission and increasing numbers of electricity energy sources from the renewable energy industry will spike up global demand.

COPPER RECYCLING

Copper is among the few materials that do not degrade or lose their chemical or physical properties in the recycling process. In 2008, ICSG estimates that 35% of copper consumption came from recycled copper. Some countries' copper internal demands greatly depend on recycled copper.

COPPER SUBSTITUTES

• Aluminum: used in power cables, electrical equipment, automobile radiators, and cooling and refrigeration tube;
• Titanium and Steel: heat exchangers;
• Optical fiber: telecommunications applications;
• Plastic

>   DOMESTIC

#   Production:

Copper production declined in the United Stated in 2010 by about 5% to 1.2 million tons compared to the 2009 levels but its value rose to about $8.4 billion.  The decline was caused mainly by mine cutbacks instituted at yearend 2008 and lower ore grades according to the U.S. Geological Survey. However, the 2011 outlook is more optimistic with expansions and restoration of cutbacks expected to push production up by more than 100,000 tons.

Copper production in the United States is concentrated in just a few states: Arizona, Utah, Nevada, New Mexico, and Montana. Although there were 28 mines operating in the United States in 2010, only 19 accounted for about 99 percent of production. 

#   Import Sources (2006-2009):

•  
  • Unmanufactured: Chile, 41%; Canada, 33%; Peru, 13%; Mexico, 6%; and other, 7%
  • Refined copper accounted for 82% of unwrought copper imports

#   Government Stockpile:

•  
  • The stockpiles of refined copper and brass were liquidated in 1993 and 1994, respectively

>   WORLD

#   Mine Production:

#   Mine Reserves:

#   Resources:

•  
  • 2010 – 550 million tones copper (identified & undiscovered resources) in the United Sates
  • 2010 – 1.3 billion tons of copper in discovered, mined, and undiscovered resources in the Andes Mountains of South America
  • Estimated global land-based resources – over 3 billion tons
  • Deep-sea nodules and massive sulfides are potential copper resources

#   Demand:

•  
  • China is the world’s largest copper buyer                                    

Supply/Demand becoming more balanced and moving into deficit, with low global inventories supporting strengthening price over forecasted period.

>   FACTS, TRENDS, ISSUES

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  • Global copper market moved into a deficit of 305kt in 2010 from a surplus of 175kt in 2009
  • Rio Tinto expects global copper consumption over the next 20-30 years to exceed the total historical consumption to date

SUPPLY ISSUES/CONSTRAINTS

“What originally began as a way for mineral-rich countries to repair and replace lost revenue from the downturn has become a way for governments to manage the effects of a two-speed economy”

Ernst & Young Canada national mining and metals practice leader Tom Whelan

Resource nationalism

The last year and a half witnessed more than twenty countries rising or planning to increase their tax and royalty regimes for the mining sector in order to take advantage of the sector’s quicker rebound from the global financial crisis. Another avenue for taping into the mining and metals’ sector’s revenues is for the governments to secure a piece of the big pie by increasing their local participation in projects.

Skills shortage

The sector was equally affected by the global financial crisis in its workforce capacity. Short-term workers “borrowed” from different industries are expected to change gears as soon as the upturn will happen, while near-retirement workers have already left the sector. This workforce shortage creates fertile ground for the labor unions to seek wage increase. The labor strikes have been observed to increase when refined prices are high and GDP is growing faster, but tend to be longer and less frequent in cool economic times as well as when copper prices are down.

Infrastructure access

Lacking infrastructure not only impedes satisfying demand but it also contributes to raising extraction costs, ultimately affecting the supply and demand dynamics. Some current and well-known rail bottlenecks include Australia’s Queensland coal rail development, China’s third coal rail development and Russia’s aging rail network.

Social license to operate

The difficulty of maintaining a social license to operate can arise from: Environmental issues (such as the impact on bio-diversity, water extraction, water pollution, air emissions, soil contamination and waste management); Risk to reputation caused by safety incidents (trading safety for profit); Land disputes (between companies and the local communities).

Capital project execution

According to Credit Agricole, there are many new mines or expansion plans cancelled altogether or significantly scaled back and the junior mines are struggling to get financing. Projects’ cancelations, delays, and/or overruns are caused for the most part by cost escalations, tight management, difficulty of execution given the scarcity of inputs, and risks assessment.

Existing Operations

Falling ore grades (in areas such as the USA and Chile), seasoned copper deposits getting exhausted, increased regulation, social and environmental pressures are just a few causes of the limited growth at the existing operations.

Price and currency volatility

Currency volatility challenges companies’ operating costs, while the ETFs add price volatility due to disconnect in between price and inventory.

Lack of capital investment and Capital allocation

The last major investment cycle in the copper market was in the 1970s. With the incentive pricing and interest rates rising, the ore grades falling, and the long lead-times to develop a mine, it is difficult to foresee another major investment event anytime soon. Exploration spending has picked-up but discoveries are few, forcing external risks to replace depleting reserves, while narrowing growth opportunities make the capital allocation decision extremely difficult.

Cost management

Sector specific costs are increasing at a greater rate than normal inflation, according to Ernst&Young. Rising operating costs are mostly caused by scarcity of labor, inputs, and capital equipment, by the price of oil and steel, and by transportation costs. Additionally, there is energy potential cost increase as coal is the chosen fuel to power the mines and processes.

Interruptions to supply

Supply response much slower than expected due to: capex cost increases, equipment and spare parts shortages (trucks, tires), more militant labor, power and water shortages (particularly crucial in dry mining districts), high domestic costs caused by higher exchange rates due in part to strong exports (the rate between imported inputs and domestic input costs is affected by the currency strength of the producer), natural and environmental disasters. Consequently, the Inventories are under pressure due to demand growth and slower supply response.

Fraud and corruption

In their quest to growth, companies venture out into riskier regions exposing themselves to political risk, security issues, fraud and corruption which can significantly alter their bottom line.

COPPER – Balanced and moving into deficit again

Global consumption rose by 7% in 2010 after falling 5% in 2009.

In 2010 refined copper demand was boosted by Chinese buying and stock building. Copper is deemed a strategic asset in China and a way to diversify from the USD and US treasuries.

A floor at $8, 500-9,000/t is evident and any dips towards this level will see consumer buying, according to Credit Agricole. Prices are expected to strengthen even further on the back of a sustainable recovery in global economic growth and demand, consistent with its role as a barometer of economic strength and a developing world infrastructure metal (Credit Agricole – Global Copper Trends 2011-2012 Report).

COPPER PRICES

Long-term fundamentals supporting copper prices: strong structural demand from newly industrializing economies, finite supply and rising extraction costs, are still present.

Copper prices have been on a roller coaster ride in the past few years, dropping almost 54% in 2008 amid global financial crisis, before staging a 130% comeback in 2009, and +33% in 2010.

Sources: USGS; Credit Agricole; InfoMine.com; Haver Analytics, Gluskin Sheff; International Copper Study Group; Global Industry Analysts; World Bureau of Metal Statistics; Ernst&Youn