Instability in store for copper market

Despite a declining demand for copper in the developed world, including a 20% drop forecast for the United States this year, it is expected that China alone will more than make up for it, says Andrew Roebuck, Teck Cominco’s (TCK. B-T, TCK-N) manager of market research.

In fact, growth in copper demand is coming almost entirely from developing countries, Roebuck said at the recent Prospectors and Developers Association of Canada (PDAC) convention in Toronto.

“Consumers are buying their first cars, first air conditioners and first refrigerators in massive numbers,” Roebuck said.

He said that consumption has been growing at a rate of 3.7% per year over the last 10 years, despite a metals recession in the U. S. and Europe.

“Chinese consumption has more than compensated,” Roebuck said.

The numbers don’t lie. Copper consumption in China has grown by an average 11.4% each year over the last 10 years.

In 2007, China consumed 26% of the world’s copper compared with just 2% in 1970; meanwhile, the U. S. consumed 11% in 2007 compared with 26% in 1970.

In that time, overall copper consumption has risen to 18.7 million tonnes from 7.3 million tonnes.

While many investors have been talking about the impact of the U. S. slowdown, Roebuck noted that a 20% drop in U. S. copper consumption equals just 0.25-1% of world consumption.

“When we look at China, the U. S. is no longer such a global player in the global copper market,” he said.

But with all that demand, Roebuck is worried about production.

In the past three years, mine production should havebeen growing at a greater rate than it actually has, Roebuck said. January forecasts have projected world production at more than 13 million tonnes, but actual production has been up to 900,000 tonnes less than expected.

“Mine supply in the copper market has been staggering,” Roebuck said. “In 2005 and 2006, disruptions due to labour action, pit wall instabilities and equipment failure all combined, took close to one million tonnes a year of copper out of planned production.”

Roebuck said that disruptions weren’t as prevalent in 2007, with labour disputes in Mexico cutting supply by about 100,000 tonnes copper, but production still fell short of forecasts. That’s because more than 100 mines reported lower than planned production. While the average decrease was only about 15,000 tonnes per mine, it amounted to a loss of 1.5 million tonnes of production.

Other mines reported slight production increases, lowering the overall shortfall to 900,000 tonnes for 2007.

Roebuck warned that copper production will remain unstable because many new copper mines are located in the Democratic Republic of Congo (DRC) and Zambia.

“This is a historically unstable region of the globe — it’s landlocked and energy poor,” Roebuck said. “You all know of the recent developments in neighbouring Kenya, along with recent announcements from the government of the DRC that indicate a move towards more revenue sharing and could delay or halt a number of new projects.”

Roebuck also discussed the three-day nationwide power outage in Zambia that affected production.

Another hurdle for copper producers is the cost of building a mine, which has increased by 47% compared with 2004.

Operating costs, which have risen 92% since 2002, are also affecting the viability of mines, Roebuck said.

At the same time, smelter capacity has grown by 2.7% each year over the last 10 years — that’s 0.4% higher than production growth.

This seemingly small gap is significant, Roebuck said, creating larger deficits year over year, making treatment charges volatile.