Metals commentary: Constrained copper supply spells trouble, analysts say

There won’t be enough copper to meet Chinese demand by the middle of the next decade, Adrian Day, president of Adrian Asset Management in London, told a group of investors at the Cambridge House conference in Toronto.

China’s consumption of the metal has more than quadrupled in the 15 years leading to 2010, and it is “unlikely there will be a major producer in 2020–2025 that we don’t already know about, and not enough to meet anticipated demand, if China’s growth continues, even at the 7.5% to 8.5% range,” he warned.

And that doesn’t take into account unexpected declines in production from existing mines, he added, citing Chile’s Escondida as an example. In 2007 the mine accounted for about 10% of world production, he said, but its production has fallen by as much as 25% since then.

“World-class copper discoveries are extremely rare,” he declared, and the statistics on current producing mines are sobering. Half of the largest copper reserves are more than 50 years old, and four of the world’s seven largest copper producers are over 70 years old. Older mines, moreover, tend to be lower grade, deeper and more expensive, as well as susceptible to problems and interruptions.

“There has been a significant decline in production from the largest copper mines, and we’re not finding enough to replace it,” he said. “From discovery to lead time can be a long time — as much as twenty to thirty years.”

As proof, he pointed to a chart with discovery and start-up dates for several copper mines, including Antamina (1991, 2001), Los Pelambres (1968, 2000), Collahuasi (1979, 1999), Grasberg (1988, 1997) and Tenke Fungurume (1917, 2009). For new projects, he cited estimates for Oyu Tolgoi (1997, 2013) and Taca Taca (1965, 2017).

And despite huge increases in exploration spending over the last decade, he added, the reduction in reserves is proof of the difficulty in finding and developing new projects.

Day’s comments on the constrained nature of the world’s copper supply were reinforced in an Oct. 1 research note by BMO Capital Markets, based on a BHP Billiton analyst site visit paid to its base-metal assets in Chile.

“Chile remains the largest copper producer globally, representing thirty-five percent of primary production, and holding twenty-eight percent of known reserves, but [BHP Billiton] stated that ‘the age of huge mines with huge grades in this country is over,’” BMO’s London-based mining analyst Tony Robson told clients. “Major copper projects required to meet demand long-term are located in riskier jurisdictions, and come with increased execution risk. Seventy-five percent of estimated additional supply required between 2010 and 2025 is from greenfield projects.”

Robson also noted that BHP Billion reported other challenges, including shortages of skilled labour, cost inflation, resource depletion and environmental regulations.

In terms of copper demand in China, Day emphasized that the appetite for more consumer goods would grow amongst the country’s emerging middle class, and estimates that per capita copper consumption has the potential to grow from today’s 4 kilograms per capita to 12 kilograms per capita. In the auto sector alone, he forecast, there is much more room to grow. There are 40 cars per 1,000 Chinese. In the U.S., by contrast, the figure is 800 cars per 1,000.