More copper capacity should go off-line, conference told

Delegates to the 8th world copper conference held in Santiago in early April heard a number of presentations about the state of the copper market, with presenters making forecasts for the short-to-medium term.

Speakers agreed that, although the market looks grim short-term, a recovery is on the cards as early as next year, with one speaker suggesting that high-cost mines should cut production until demand is restored.

Drawing a parallel to the situation of the fibre optic cable market after the dotcom meltdown in 2001, Jon Barnes, principal consultant at CRU Group, termed the situation of the fibre optic cable industry at the time “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 suggests that more high-cost copper mines should cut back on production for the time being, to help restore market balance.

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

Barnes identifies only two end-use segments projected to grow in 2009: power cables, and rod, bar and alloy wire, both in utility networks. All other segments will 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 concludes that this year will see volumes down by 15-20%.

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

While Barnes is decidedly bearish on the short term, projecting that copper consumption will be15.9% down and refined copper volumes 13.5% off for the year, he does 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 that copper consumption will be 8.9% higher next year compared to 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, copper consumption will be 6.6% higher, while refined copper volumes will be 6% up. And In 2012, copper consumption will rise 5.6%, and refined copper volumes will advance 5.3%.

Adam Rowley, executive director at Macquarie Securities, also sees a sharp pullback in copper demand this year, but his projection is not as bad as Barnes’ numbers.

While Barnes expects copper consumption to fall by 15.9% this year, Rowley only sees a 9% decline in demand, because of the moderating effect of China. Looking at world copper demand excluding China, Rowley projects volumes declining by 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. 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 the basis of cash costs.

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 of deliberate closures and production cuts, coupled with production problems. He expects a 300,000 tonne increase in global mine production this year, but, because of cutbacks and disruptions, he projects a small net production decline.

Rowley pinpoints 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 Bureau (SRB) adding at least 300,000 tonnes to its stockpiles in the first half of this year.

It remains to be seen whether SRB stockpiling persists, and if it does, Rowley believes that copper availability will be tight even with weak global demand. He cites 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 will 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 (3-5 years) looks more positive due to a lack of committed new supply additions.

Rowley projects mine production at about 15.5 million tonnes copper this year, slightly down from last year. This is projected to create a surplus of 940,000 tonnes, with prices averaging US$1.55 per lb. Next year mine production will 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, mine 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 mine production will grow to 17.4 million tonnes, yielding a deficit of 90,000 tonnes, and average prices of US$2.50 per lb. In 2013 mines will produce 18 million tonnes copper, creating a deficit of 260,000 tonnes, with prices remaining at US$2.50 per lb.

Both Macquarie and the CRU Group see the copper market moving to a deficit in 3 years.