<but I expect copper, steel, etc too>
Let's consider what that (prices going down) might require for copper. World consumption in 2003 was 11,830 MT, and that's headed higher. But even if you stop Chinese/Asian consumption dead in it's tracks right here, the range of most analysts is for a supply-demand deficit of 500-800 MT/year. That's 4-7% of total world consumption. Mine is closer to 1.0 MT, and I base that on straightforward reasoning: that's been the steady, consistent draw down of about 5000 a day (actually closer to 6000, so I'm being conservative) we've seen all year. If I based that on 240 days a year, it would actually be 1,200 MT, but I'm also assuming Grasberg comes back.
Whatever number you use, it suggests that one heck of a lot of industry dependent on copper needs to really cut back and ration, severely. The economic impact of such a contraction is enormous. The primary short term factor in that equation is the repair of the slide at Grasberg in Irian Jaya, that has taken about 250k-300k MT out of production. Almost all the projections factor that coming back on line in about June. FCX has been dead silent about that, but it's expected they will update the progress of the repairs when they report in a few weeks. If it's delayed, you better be prepared to use my 8-9% deficit figure.
The draw down: As of today there was 488,000 MT above ground in the inventory in the three primary sources of Comex, LME, and Shanghai. That's about 14 days of total annual consumption. If the market wasn't in deficit, I suppose the world could manage to squeeck by on that. Nickel is at only 3 days supply, but the product keeps coming in. But one little disruption there, and it will be all gone in an instant. Tin ditto, but it appears to be continuing to draw down, that could be the first to completely run out above ground. Lead is starting to look dicey too. So if copper drawdown continues at it's 5000-6000 MT pace, then around the end of May, we will use up another 200,000 MT. I would expect that Shanghai and LME empty out first, and then it all turns to Comex. Comex has some interesting rules about delivery. In fact, there tends to be games played there about "real inventory" (you will recall the silver story). We will see if they can come up with the remaining copper supposedly above ground.
So I'd have to say that to slow things down enough to cause a drop in 5 (if you're real lucky, China grows no more, and Grasberg come on smoothly)-10% (you're unlucky about Grasberg, and China doesn't stop consumption growth) of total consumption and cause a drop in copper prices, China had better pull the plug on it's economy now, in fact yesterday. Such logic makes little sense when you have the numbers on this. it will be involuntary contraction (Train Wreck) not voluntary macro-management.
Short term challenges to overcome:
Mining Disrupted
BHP Billiton, based in Melbourne, has said output at Chile's Escondida mine is behind schedule. Freeport-McMoRan Copper & Gold Inc., based in New Orleans, in January said production at Grasberg in Indonesia will fall about 180,000 tons short of expectationsthis year because of two landslides.
BHP Billiton is the world's largest mining company. Freeport,in addition to its copper holdings, owns the world's biggest gold mine. Codelco, the world's biggest copper miner, last month cut its forecast output for the year by about 50,000 tons to 1.8 million. Ok Tedi Mining Ltd. in Papua New Guinea said last month it lost about 12,000 tons of production after a fault was found in January at one of its two processing mills.
New supplies won't make up the difference. Phelps Dodge, the world's No. 2 copper producer, plans to restart 113,000 tons of capacity this year to help meet demand. Taseko Mines Ltd. said last month the 35,000-ton Gibraltar mine in Canada will restart in October. The global deficit this year may widen to 850,000 tons, or 5 percent of total production, according to Stephen Briggs, an analyst at Societe Generale in London.
What about new longer term mine supply? I'll borrow this from some Doug Casey commentary:
The big issue with supply is that the majority of the world's copper deposits have already been discovered, mostly in the 1960s. They've been found because copper is usually located in near-surface porphyry deposits - structures with a large geological "footprint" that make them relatively easy to find and, once found, easy to understand and to exploit.
As a result, new discoveries are hard to come by and tend to be deeper and harder to mine. Recent examples are Ivanhoe's Turquoise Hill in Mongolia, a buried porphyry, and Rio Tinto's recent find in Arizona, a resource
located at a depth of 2,000 meters. To state the obvious, the deeper the mine the more time and the more money is required to put the mine into production.
For example, Turquoise Hill - a large resource estimated at 19 million tons - won't be put into production until 2007 at the earliest, and, depending on the size and production plan, only after an expense of up to
$2 billion.
Cutting to the chase, in order for the copper industry to off-set the fast approaching supply/demand shortfall, it will have to do much, much better - in fact, it will require a new mega-mine on the order of Turquoise Hill to come on line each and every year for the foreseeable future.
Yet, looking over the horizon, there is only one large copper mine, Sossego in Brazil, slated to come on stream in the foreseeable future, later this year, or early next.
Bottom line: the odds of the mining industry being able to find and bring on enough new mine supply to head off the coming copper crunch - in the short, medium or even long-term - is slim to none, and slim is being body-searched. |
