Copper reinvents itself as modern, growth story
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In the period between 2001 and 2002 the copper industry entered a recession, which led global industry participants to take the almost unprecedented step of curtailing output in a bid to restore a semblance of market balance and some supply discipline.
Now, two years later, copper is experiencing bull-market conditions with prices having only recently come off near 16-year highs and with observers expecting continued price strength for the foreseeable future.
London Metal Exchange (LME) copper prices have surged by more than 130% from a 15-year low in November 2001, with the benchmark LME copper price hitting a peak at $3 123/t on October 12, the highest level since the January 1989 price of $3 280/t.
But, as with all commodities, price forecasting is unreliable and an indication of just how volatile conditions can become, particularly when speculators are active in a market, was clearly demonstrated last week when copper prices dropped by more than 10%.
It appears that the sell-off started in China with rumours of a yuan revaluation and were exacerbated by so-called model-based trading accounts, which pay little attention to fundamentals and trade automatically. Strong oil prices and their threat to economic growth had also reportedly played a part in the major readjustment of runaway metals prices.
However, close observers believe the fundamentals for copper remain strong and that China will continue to play a positive role in demand.
Speaking during a company base-metals briefing last week, BHP Billiton's base-metal marketing director John Crofts said that looking at copper demand growth on a worldwide scale, there is no denying the importance of China.
Although the analysis of China's remarkable growth path has been focused largely on the last couple of years, Crofts noted that the Chinese growth story is in fact not new at all.
“We have seen significant growth in Chinese copper consumption since the early 1990s, but I guess in some sense it was perhaps masked at the time by the decline in the Russian CIS demand, which acted as an offsetting factor,” he noted.
Current statistics reveal that China has now become the largest market (more than 20%) for refined copper in the world, passing the US as the world's biggest copper consumer in 2002, and outstripping it by 35% in 2003.
“Of the 16-million tons of copper consumed yearly, China's copper demand has grown to over three-million tons this year and we are predicting further increases in demand going forward,” Crofts said.
Interestingly, Crofts believes that China's ravenous hunger for minerals is not so much driven by a high-intensity use of these minerals, but rather by the size of the country's population.
“If China continues to grow its per capita gross domestic product (GDP), its mineral demand, including its demand for copper, will inevitably continue to grow as well,” he added.
The key message emerging, Crofts said, is that copper is and remains a modern and relevant growth metal, demand for which is set to grow in line with GDP growth per capita.
“It would seem that the demand for copper increases as the wealth of a country rises, albeit with some unpredictable global economic shocks along the way,” noted Crofts, adding that, as the per capita GDP rises, people tend to spend more money on copper-absorbing products, such as air-conditioners and electrical appliances.
He said further increases in living standards usually also see luxury products replacing standard products.
“Many of these luxury products, such as hybrid cars, use more copper, which ultimately bodes well for the future of this metal,” he said.
Copper is believed to form a key part of the Chinese growth story and the low cost of Chinese production, in particular, is undoubtedly opening up new markets for copper.
The Chinese, Crofts explained, can produce air conditioners at a unit cost that is significantly lower than that of air conditioners manufactured in other countries around the world.
“This does not only make the importability of air conditioners throughout Asia's warm climate much higher than in the past, but ultimately also helps stimulate incremental demand for copper in that part of the world,” Crofts explained.
“In a sense, one can say that air conditioners are moving from a luxury product to an everyday item, something that is, of course, very positive for copper,” he adds.
China's low-cost production, how-ever, also has a follow-on effect on the country's endeavour to build up its electricity-generating capacity as there is an increased demand to generate electricity to run all these electrical appliances.
Overall, Asia accounts for more than 50% of global copper demand.
India also seems to be emerging as another key copper consumer and, although the country is not expected to replicate China's growth any time soon, the country's already healthy copper demand is expected to continue growing in the future.
Industrialised countries have seemingly followed distinctive intensity paths in the demand for copper.
Korea and Taiwan, for example, have shown very strong increases in copper intensity per capita as they industrialised since the 1970s, while Japan followed a path of slower, but consistent, increases in copper demand intensity of GDP (per capita) during its post-Second World War industrialisation.
Crofts says that, in BHP Billiton's analysis, the path which China is likely to follow in the future is not yet clear.
“In our analysis, we are not sure it really matters though. A path similar to Korea and Taiwan will see the cannibalisation of manufacturing capacity in other countries, and the relocation of that capacity to China,” Crofts revealed, adding that China is more than likely to fall somewhere between the path of Korea and Taiwan and that of Japan.
BHP Billiton is not alone in its excitement over China and India's burning appetite for copper though.
Copper number two Phelps Dodge, which produced slightly more than a million tons of copper last year, says that there is no let-up in Chinese copper demand and predicts that India has the potential to be as important a copper-consuming country as China in the five- to 15-year range, creating a positiveness in the market going forward.
Industry observers agree that the importance of China to the global copper market cannot be overemphasised, saying that the country's appetite for copper will remain strong in 2005 and beyond.
The optimism about the demand for copper is having a considerable effect on the number of projects undertaken by the bigger copper producers.
Mines are looking to increase production largely through brownfield projects and some limited greenfield projects.
As the third-largest copper producer in the world, BHP Billiton, for example, has a portfolio of growth projects with the potential to raise its overall copper output by about 50% to 1,4-million tons a year by 2008.
The company's base-metals president, Diego Hernandez, reported that it is already engaged in projects involving capital expenditure of $1,27-billion and that it is considering a further $1-billion investment, which would go before the board before the end of the year.
BHP Billiton has already brought its idled capacity back on-stream and last year produced about 900 000 t of the base metal.
During the current financial year, it is planning to produce about a million tons, assuring its position as the third-largest producer after Codelco, of Chile, which produced more than 1,8-million tons last year and Phelps Dodge, which produced slightly more than a million tons in 2003.
However, BHP Billiton says it is now eyeing second spot and believes it has the necessary projects in place or in the pipeline to help it achieve that goal.
The company has two significant projects already under way, including the $400-million Escondida Norte project, which is scheduled for completion by the end of this year, and the $800-million Escondida sulphide leach project, which will ramp up to full production by 2007.
Both projects are located at the giant Escondida copper-mine in Chile, which is also the world's largest copper operation and in which BHP has a 57% stake, with the balance held by, among others, Rio Tinto. BHP Billiton, meanwhile, is also in the final stages of studying a new wholly-owned greenfield project, known as Spence, at Sierra Gorda in northern Chile.
Hernandez said the project feasibility study has been completed and that a capital expenditure review has led to an increase in the project's expenditure from $900-million to $1-billion.
The project will produce 200 000 t/y of copper cathodes and the first cathode is expected to be produced in the fourth quarter of 2006.
The mine's expected life is 19 years and the project will go before the BHP Billiton board before the end of the year.
Phelps Dodge, meanwhile, has approved an $850-million expansion of its Cerro Verde mine near Arequipa, Peru, which will see the mine's production triple by 2007 to 300 000 t of copper a year.
Within two to three years, the company also hopes to produce about 125 000 t from a project in Safford, Arizona, about 20 miles south-west of its Morenci mine.
Each year Codelco, the world's number-one copper producer, also manages a broad portfolio of projects aimed at improving copper production conditions, including exploration and exploitation of new deposits, infrastructure improvement, incorporation of technology, progress in labour and environmental conditions, and research and studies.
During 2003, $639-million was invested in 400 projects in all of Codelco's divisions.
Copper optimism is also shared by smaller companies, with South African mid-tier multicommodity miner Metorex having advanced studies for the first phase of the two-phase Ruashi copper/cobalt project in the Democratic Republic of Congo.
The project is to be developed in two phases, the first being the construction of a concentrator to treat the oxide stockpiles at both Ruashi and Etoile for about four years and the second, mining of the Ruashi opencast orebody.
Phase one, comprising the mining of the stockpiles, will take place at an average rate of 70 000 t/m, yielding 7 000 t to 10 000 t of copper and 1 100 t to 1 300 t of cobalt a year in concentrate.
Mining of the main Ruashi openpit orebodies during phase two is envisaged at a rate of about 120 000 t a month to give about 40 000 t of copper and 3 000 t of cobalt a year.
Phases one and two are expected to bring a life of mine of over 30 years.
It would seem that the recent strong copper prices were mainly supported by stock withdrawals from metal exchanges and the fact that stock-to-consumption levels are at historic lows.
“LME stocks are 1,35-million tons down since April 2002 and have fallen every month this year, even through the traditional Northern Hemisphere seasonal slowdown,” said Crofts, adding that up until September, stocks have come down by 650 000 t so far this year.
Crofts said although copper is likely to move into surplus in the second half of 2005, the industry predicts an overall deficit for the year.
“The custom concentrate market and the current smelter bottleneck could well constrain the flow of copper metal to the refined market, which, in effect, could provide further tightness in the supply and demand balance for 2005,” Crofts warned.
The fact that there is more concentrate capacity available than smelter capacity is very likely to also put upward pressure on treatment and refining costs.
However, BHP Billiton views the development as important to restoring balance in the copper sector.
Crofts said that, for the last three or four years, treatment and refining costs have been at unsustainable low levels, which has meant that custom smelters could not cover their operational costs, something which is by no means a sustainable long-term structure for the industry.
“The fact that the bottleneck has emerged and that treatment and refining costs are rising is a healthy sign that the industry is well on its way to move back to a sustainable long-term structure.
“Ultimately, the treatment and refining cost increases will see custom smelting capacity expand, which will be necessary to meet the flow of additionally-produced material that a higher copper price is inducing,” Crofts explained.
Contract negotiations are currently under way between suppliers of copper-in-concentrate, such as BHP Billiton, and the smelters and refiners, but the company would not be drawn on where it expected the treatment and refining charges to settle.
With high copper prices and increasing demand, there is no doubt that copper has made a welcome comeback.
Indeed, as Crofts has reflected, copper has managed to reinvent itself from a dead-duck metal to a modern, relevant growth-metal.
Concerns do exist about rising operating costs, particularly those related to fuel and power.
However, BHP Billiton is confident that the pressures on its operational costs are manageable.
“We expect operational cost increases, but these increases are really marginal compared to our higher margins as a result of the higher copper prices,” Hernandez assured.
The big challenge for the copper industry will be its ability to increase production in a disciplined manner, as well as the speed in which shattered capacity is restarted and new production is started.
Producers will have to develop lower-cost projects and guard against excess supply which could see copper prices once again slump back to historic lows
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