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Talking Copper Supply, Demand & Production Shortfalls

Richard (Rick) Mills
Published 10/25/2010Copper’s talking up a storm.

Sumitomo Metal Mining Co. said copper ore mined from Chile, and shipped to Indonesia, will be in short supply for at least the next five years.
Antofagasta Plc, which owns three Chilean mines, said a scarcity will persist for “the foreseeable future.”
BHP Billiton Ltd. said production from Escondida in Chile, the world’s biggest copper mine, will drop as much as 10% in 2011 because of lower ore grades.
Freeport-McMoRan Copper & Gold Inc. said it plans to defer some output at its Grasberg mine (the world’s second largest mine) in Indonesia. Citing safety reasons, Freeport will forego the mining of about 130 million pounds of copper through 2014.
Global treatment fees have tumbled as smelting capacity has outpaced mine supply.
The Metal Economics Research Institute of Japan said the shortage of copper to process has pushed processing fees to the lowest level in almost 40 years. The cost of turning ore into metal – $39 a ton and 3.9 cents a pound – is the lowest since 1973.
Jiangxi Copper Co., China’s biggest copper producer, said treatment and refining charges have dropped to a level that doesn’t cover the costs of smelting in China.
Sumitomo Metal said it plans to produce only 404,000 tons of copper cathode in 2010 – 10% less than the 450,000 ton capacity at its Toyo smelter – and the company says it’s likely to keep output at that reduced rate until at least 2014.
“We don’t want to increase output with raw material sourced from the spot market” where fees are even lower,” said Nobumasa Kemori, president of Sumitomo Metal.
Rio Tinto Ltd. – at a recent industry Conference in London – said that planned copper mining projects will be unable to support demand growth at current rates and we could see the market for mined copper in deficit for most of the next decade.
Rio sees production from probable copper mining projects as only able to support annual demand growth of 3% per year by 2020. Rio also said less than half of the world's copper supply, by 2020, will come from low risk regions compared to nearly two thirds in 2000, ore grades will continue to decline and major new copper discoveries are increasingly deep below the surface.
Metal analysts CRU International said copper consumption in China is forecast to rise by 14% this year.
New Delhi-based credit rating agency Icra said India’s copper consumption is forecast to climb 15% this year.
The annual per capita consumption of copper in India is 0.47 kilograms, China’s is 5.4 kg and the world average is 2.7 kg. China’s urbanization plans and forecast Gross Domestic Product growth of 9.6% a year is expected to drive Chinese copper consumption from the current 5.4 kg/capita to an astounding 10 kg/capita by the end of the decade.
Copper has risen to its highest demand levels since July 2008. The International Copper Study Group just said global demand for copper will rise by 4.49% in 2011.
BMO Financial Group said it anticipates a global supply deficit of some 280,000 tonnes – with a price forecast of $3.70 a pound – for 2011.
Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus this year to a deficit of around 400,000 tonnes next year. They also expect global yearly demand growth to be between 3% and 5% which would represent an incremental annual consumption increase of 600,000 to 900,000 tonnes.
“The positive copper price outlook is buoyed by demand from strong economic growth in China and constrained global supply, “ said John Wilson, RCR managing director. “Other than for the period around the global financial crisis, this has been the central theme of the copper market since the early 2000s and is likely to remain the theme throughout this decade.”
Swiss bank UBS had the following to say about a second round of quantitative easing (QE2) by the US:
“Strong international capital flows will reinforce already powerful domestic credit creation in emerging markets (EM). That should flow through to robust, commodity-intensive growth in EM, while the developed world struggles in the face of higher commodity prices. We believe that QE2 will prolong the Bull Market in commodities."
Raju Daswani, managing director of Metal Bulletin, said “Copper prices will remain on a broad upward trend. For 2011 our price forecast is $7,900/tonne compared to our 2010 forecast of $7,375.”
As I’ve said many times, mining is the story of depleting assets. New mines are needed to replace those that are being depleted. The deposits that are going to be the new mines of our future are almost all owned by junior companies. These junior companies – the very same juniors that own those future mines – are currently trading, in this author’s opinion, at deep discounts.
Copper’s talking, are you listening? Are copper, and a few quality copper juniors, on your radar screen?
If not, maybe they should be.
Richard (Rick) Mills is president of Northern Venture Group and host of aheadoftheherd.com. He can be e-mailed at rick@aheadoftheherd.com.