Copper Recovery Expected In Early 2010: Conference

Although the market looks grim in the short term, experts suggest a recovery in the copper price is in the cards as early as next year.

In the meantime, Jon Barnes, principal consultant at CRU Group, suggests that high-cost mines should cut production until demand is restored.

Speaking at the 8th World Copper Conference held in Santiago in early April, Barnes drew a parallel to the situation of the fibre-optic cable market after the dotcom meltdown in 2001, calling the industry crash a “nuclear winter.” Volumes took six years to recover, while fibre-optic cable prices have never recovered.

To avoid a replay of that disastrous scenario in the copper market, Barnes suggested that some copper mines temporarily cut back on production to help restore market balance.

“High-cost producers must turn off the tap, unless you want to face a nuclear winter,” he said.

Barnes identified only two end-use segments projected to grow in 2009: power cables, and rod, bar and alloy wire, both within utility networks. All other segments are expected to contract or, at best, stagnate.

Export volumes, about 375,000-390,000 tonnes per month in January-February, are 32% down on the same months last year, and since export volumes in the first half of the year are traditionally higher than second-half figures, Barnes sees no escape from a year of lower volumes, even if the recovery were to start some time in the second half of 2009. He concluded that this year would see volumes down by 15-20%.

Barnes forecast sharply lower volumes in all product segments this year. In copper and alloy semi-manufactured products, he projected that volume would crash 30-40% for the year. In wire-rod and drawn wire, volumes are about 220,000 tonnes per month, down 23% from last year, while volumes of insulated copper wire and cable, at about 395,000 tonnes per month, are 32% behind last year’s numbers.

While Barnes was decidedly bearish on the short term, predicting that copper consumption will be down 15.9% and refined copper volumes 13.5% off for the year, he did see an improvement starting next year. The driver for this turnaround is industrialization in the developing world, and this entails electricity and copper.

Barnes projects copper consumption will rise 8.9% next year over 2009 levels. This will be made up of an 8.7% increase in refined copper consumption, and a 10% hike in scrap copper volumes. In 2011, he expects copper consumption will be 6.6% higher, and refined copper volumes 6% higher. And in 2012, he forecasts copper consumption will rise 5.6%, and refined copper volumes will advance 5.3%.

While Barnes expects copper consumption to fall by 15.9% this year, another presenter at the conference, Macquarie Securities executive director Adam Rowley, was less bearish in his projections, forecasting only a 9% decline in demand because of China’s moderating effect. Looking at world copper demand excluding China, Rowley projected volumes declining 16% this year.

With falling demand, inventories have risen by about 600,000 tonnes since mid-2008. Warehouse inventories are now equivalent to four weeks’ consumption, and prices have fallen to just above US$3,000 per tonne from nearly US$9,000. Surprisingly, even at these much lower prices, most copper miners are still profitable on a cash cost basis.

Prices would have been even lower were it not for supportive factors: production disruptions and cuts, reduction in scrap availability, and a surge in Chinese buying to replace scrap and replenish official stockpiles.

Rowley has slashed 1.5 million tonnes from Macquarie’s 2009 copper production forecast as it stood at the beginning of 2008, owing to deliberate closures, production cuts and production problems. He expects a 300,000- tonne increase in global mine production this year, but, because of cutbacks and disruptions, this will turn to a small net production decline.

Rowley pinpointed Chinese buying as a critical factor. China bought less than 100,000 tonnes copper per month in mid- 2008, but in the December-February period this has surged to more than 200,000 tonnes per month. Although the intensified buying is partly motivated by a lack of scrap, Rowley believes that the Chinese now want to stockpile metal, with China’s State Reserves Bu- reau (SRB) adding at least 300,000 tonnes to its stockpiles in the first half of this year.

If SRB stockpiling persists, Rowley believes that copper availability will be tight, even with weak global demand. He cited rumours suggesting that China would like to stockpile another 600,000-900,000 tonnes copper.

Rowley estimates that, of a total consumption of 23 million tonnes copper last year, 8 million tonnes were sourced from scrap. Reduced scrap availability may decrease supply by 1 million tonnes this year.

The Macquarie projection is based on the economy bottoming in mid-year, with a modest recovery starting in late 2009. Copper demand is expected to start improving in late 2009 at the earliest. If SRB buying slows down or stops, copper inventories will rise sharply, and the copper market will weaken again in the second half of the year. The medium-term outlook (three to five years) is more positive due to a lack of committed new supply additions.

Rowley projected mine production at about 15.5 million tonnes copper this year, slightly down from last year. This is expected to create a surplus of 940,000 tonnes, with prices averaging US$1.55 per lb. Nextyear, mineproduction is forecast grow to about 15.8 million tonnes, creating a surplus of 210,000 tonnes, and an average price of US$1.80 per lb.

Moving to 2011, Rowley anticipates production will advance to 16.5 million tonnes, resulting in a deficit of 30,000 tonnes, and an average price of US$2 per lb. In 2012, he expects mine production to grow to 17.4 million tonnes, yielding a deficit of 90,000 tonnes, and average prices of US$2.50 per lb. And in 2013, Rowley projects that mines will churn out 18 million tonnes copper, creating a deficit of 260,000 tonnes, with prices remaining at US$2.50 per lb.

Both Macquarie and CRU Group see the copper market moving to a deficit in three years’ time.