POLITICAL RISK A SIGNIFICANT FACTOR

The latest VM Group metals report suggests copper is looking at sustained periods of deficit ahead with prices continuing to rise

Author: Lawrence Williams
Posted: Tuesday , 25 Aug 2009

LONDON -

In their latest Metals Monthly report for BNP Paribas/Fortis Bank on the global copper market, London's VM Group analysts Laila Manji and Carl Firman conclude that in the mid-term, should demand grow at its historic long term trend rate of 3-5% a year then demand could amount to as much as 26 million tonnes in 2016 and 31 million tonnes by the end of the decade as compared with around 18 million tonnes in 2008 (ICSG figure). Indeed the VM Group considers this a conservative view given that 2004 and 2005 both saw far higher growth rates than these figures would suggest.

Even on the low end 3% growth scenario the world will need more than an additional 4 million tonnes a year of copper by 2016 and 7 million tonnes a year by 2020. While there appears to be a potential 6.5 Mt/year of additional copper supply from projects with estimated mineral resources greater than 500 t/y, most of this extra metal they expect will start production on schedule. But, they also point out, there is a significant risk that some of these major projects will be delayed or disrupted - and there is very little wriggle-room for what is likely to be a very tight global supply-demand balance over the next half dozen years.

While the production estimates may also be even a little conservative, should demand end up being at the upper end of the scale it looks very much as if the sector may go into deficit in any case - and several of the major potential projects due on stream over this period do face what could be called severe above-ground risks being in areas where political risk in particular is potentially high.

While these are four of the biggest new copper projects due on stream during the next ten years, it is by no means certain that all the other projects currently mooted will come to production without setbacks and delays.

However, the analysts go on to say, "the demand growth will need to be met, somehow - and higher copper prices are the only mechanism by which that can happen, by stimulating exploration and development. But there has been a distinct shortage of discoveries of world-class mineral resources (>500 Mt) in the past decade, in spite of higher exploration investment. The kind of big mineral deposits that are going to be needed are just not being found - or at least, they are getting scarcer. This is potentially bullish for prices over the longer-term, particularly given the fact that the more traditionally politically stable and industrially reliable copper producers - Chile especially - appear to be reaching a production cap."

They point out that if all the planned new projects start on schedule - which they describe as "a big if"- then the additional 6.5 Mt/year of copper supply will in any case suffice only to keep in step with their conservative scenario for newly emerging demand by 2020. But if world copper demand growth averages 5%/year over the next 10 years then there will be a severe structural deficit, with all that implies for the copper price.

While expansions at existing mines and new smaller projects may help make up some of the balance, other big mines are growing old with diminishing grades and nearing the ends of their lives. Additionally many of the smaller projects are also located in high risk jurisdictions which could subject them to cancellation or delay, while there are always ongoing disputes and other unforeseen circumstances which can adversely affect output at established mines.