The changing 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 manager of market research.

In fact, growth in copper demand comes almost entirely from developing countries, Roebuck said this week at the 2008 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 says.

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

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

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 to just 2% in 1970 while the US consumed 11% in 2007 compared to 26% in 1970.

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

Roebuck says that while many investors have been talking about the impact of the US slowdown, a 20% drop in copper consumption is just 0.25% to 1% of world consumption.

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

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

In the past three years, mine production should have been growing at a greater rate than it actually has, Roebuck says. 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 says. “In 2005 and 2006 disruptions due to labour action, pit wall instabilities and equipment failure all combined, took close to 1 million tonnes a year of copper out of planned production.”

Roebuck says that disruptions weren’t as prevalent in 2007, with only labour disputes in Mexico causing a loss of about 100,000 tonnes of 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.

Overall, production was short 900,000 tonnes compared to January forecasts due to 600,000 tonnes of unplanned production increases.

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

“This is a historically unstable region of the globe it’s landlocked and energy poor,” Roebuck says. “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 went on to discuss the three-day nation-wide power outage in Zambia that affected production.

Another hurdle for copper producers is the cost of building a mine which now stands at an average $12 billion — a 47% increase from 2004.

Operating costs are also having an impact on a mine’s viability, which have risen 92% since 2002.

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 signficant, Roebuck says, creating larger deficits year over year, making treatment charges volatile.