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As a general
rule, the most successful man in life is the man who has the best information
In this
author’s opinion, China, and to a lesser extent India and other
developing nations, are responsible for the largest and longest base metals
bull market the world has ever experienced. Many fear the bull market for
natural resources is over when in fact nothing could be further from the
truth. This seems especially true, because of the supply/demand picture,
regarding copper.
Copper's
chemical and physical properties:
- High ductility
- Corrosion resistant
- Malleable
- Excellent
conductor of heat and electricity
- Alloyed with
other metals - zinc to form brass, aluminum or tin to form bronzes or
alloyed with nickel - it acquires new characteristics for use in highly
specialized applications.
Copper is used for:
- Conducting electricity and heat
- Telecommunications
- Transporting water and gas
- Industrial machinery and equipment
- Coins for currency
- Roofing, gutters and downspouts
- Protecting plants and crops
- A feed supplement
Copper’s
price hit US$3.75 per pound in May 2006 after rising from a 60 year low of
US$0.60lb in June 1999. By February of 2007 it had dropped to US$2.40lb but
had rebounded to US$3.50lb by April 2007.
By
February 2009 copper prices were - because of weakening global demand and a
steep fall in commodity prices - at US$1.51 per pound.
Copper
prices started a comeback and during the summer of 2009 and again during the
summer of 2010 the price of copper defied conventional market wisdom –
sell in May and go away – by rallying strongly and in 2010 managed to
hold close to its recent highs coming into the end of August.
Copper
inventories at the London Metal Exchange (LME) and Shanghai Futures Exchange
have both seen dramatic reductions.
 
Copper
exploration/development companies looking for or trying to develop deposits
already found and copper miners looking to expand their production capacity
are all facing some serious challenges:
- Falling ore grades
- Country risk
- Water supply
- Labor problems, strikes
- Shortage of skilled labor
- Cost of
capital for project finance
- Capital cost overruns
- Tax and sharing initiatives
- Energy costs
- Inadequate
exploration funding - The Metals Economics Group estimates that
exploration spending plummeted 42 percent to $7.7 billion in 2009.
- A lack of
new discoveries
- Currency fluctuations
"The reason why the prices are
holding up so very high is that there has been only marginal increases in new
copper mine development over the past five years."
Patricia Mohr, Vice President, Economics at Scotiabank Group in Toronto.
On August 24th
2010 The International Copper Study Group (ICSG) released preliminary data
which showed world copper production fell short of refined usage by 190,000
tons in the first five months of 2010.
This author believes
the full ICSG report showcases an underperforming industry and tells us there
is the potential for a large copper demand/supply imbalance coming in the
near future.
Also consider:
The declining rate of
production at the world's largest copper mine, Escondida. BHP Billiton
forecasts a 5 to 10 percent production cut at the mine this year due to lower
ore grades - Bart Melek, Global Commodity Strategist with BMO Nesbitt Burns
in Toronto, said this could take as much as 80,000 to 100,000 tonnes of
copper out of the market.
- U.S. copper
mine production had been expected to increase by more than 200,000 tons
last year, instead production declined by 120,000 tons
- Rio Tinto
and Freeport McMoRan both saw their output drop in the first six months
of this year
- A lack of
investment in new mining capability because of recent low prices
- The growth
in demand from China, India and other emerging markets
- Consistent
declines in warehouse inventories are underpinning the price of copper
- A low
interest rate environment bodes well for the whole resource sector
- The overall
weakness in the U.S. dollar translates into support for dollar
denominated metal prices
- The
potential for a drop in production from Australia - the world's fifth
largest copper producer - as a result of a resource tax the government
might implement
- India's
power production needs to rise by 15 to 20 percent annually which means,
according to the International Energy Agency (IEA), India needs to invest
$1.25 trillion by 2030 into its energy infrastructure. Because of this
investment into new infrastructure India's annual copper demand is
expected to more than double to nearly 1.5 million tonnes by 2012 - up
from a current 600,000 tonnes. India usually exports between 100 and
150,000 tonnes a year, Indian copper exports are likely to cease and
indeed Indians might become large copper buyers
"There is no question that the
current production numbers are to some degree validating that there is an
issue starting to manifest itself on the supply side.” Mark
Liinamaa, vice president of market research with Morgan Stanley.
"Prices are underscoring the
relatively robust nature of physical conditions and from a business cycle
perspective inventories remain fairly low. If economic conditions deteriorate
there isn't going to be that much destocking as manufacturers have been quite
disciplined ... The market is factoring in the fact that supply tightness is
not going away." Dan Brebner, analyst at Deutsche Bank
According to
Barclays Commodities Research analysts copper is forecast to average $6989/t
this year and $7763/t in 2011.
For 2011, BMO
anticipates a global supply deficit of some 280,000 metric tons, with a price
forecast of $3.70 a pound.
Investors have concerns:
- The extent
of the recovery currently underway in the US and Europe
- A slowdown
in Chinese growth
China
“Copper consumption estimates for
China are being revised up. Huge spending on copper-intensive power
infrastructure on the state grid in ‘rural areas' will continue through
2012 (12 bn RMB). Beijing has also renewed the ‘home appliance subsidy
scheme' and is promoting electric cars, which are twice as copper-intensive
as conventional vehicles.” Patricia Mohr Scotiabank
economist
Mohr
also said that China's demand for copper will grow 13% this year and by
another 8-10% in 2011.
"I think the global growth story is
back on. China, India, and Brazil, especially, are just growing by leaps and
bounds ... and they need the copper for housing and infrastructure."
Michael K. Smith, president of T & K Futures and Options Inc.
The Chinese
are:
- Increasing
the level of housing construction
- Seeing
strong increases in car sales, up over 50 percent yoy
- Targeting
urban population growth of 60 percent by 2020, this is up from 49
percent in 2010*
- Currently
consuming 40 percent of total global base metal production
- Raising
domestic metal prices, by stockpiling, to stave off unemployment
- Creating and
transmitting more electricity
- Providing
massive direct subsidization of export production in many key industries
- Maintaining
strict non-tariff barriers to imports
- Keeping
their currency, the yuan, at an artificially low exchange rate - the
undervalued currency keeps China's exports cheap
*Chinese urbanization
- At the end
of 2009 mainland China's total population was 1.334 billion. 712 million
people or 53.4 percent of the population were residing in rural areas
while 622 million or 46.6 percent were residing in urban areas - Chinese
urban dwellers are the largest such population in the world
- City's Blue
Book: China's Urban Development Report No. 3 said China's urban
population is twice that of the population of the United States, one
quarter more than the total population of 27 countries of the European
Union and that the urban economy would continue to drive domestic demand
- The UN has
forecast that China's population will have about an equal number of
people, the 50-percent point phenomenon, living in the rural and urban
areas by 2015
- China has
set a goal of 65 percent of urbanization rate in 2050. Over the coming
40 years that means 20 percentage points of urban growth per year, that
translates into 300 million rural residents becoming urban residents over
this time period
- By 2025
China's urban population is expected to rise to 926 million. By 2030
that number will increase to a billion
- China's
current urbanization rate of 46 percent is much lower than the average
level of 85 percent in developed countries and is lower than the world
average of 55 percent
- In 2010 the
disposable income of the urban population stood at 17,175 yuan per
capita - the net income of the rural population was 5,153 yuan per
person
- Over the
next two decades China will build 20,000 to 50,000 new skyscrapers
- By 2025, 40
billion square meters of floor space will have been built
- 221 Chinese
cities will, by 2025, have one million people
- More than
170 cities will need mass transit systems by 2025
"The growth potential of the vast middle
and western regions, together with the rapid development of small cities and
towns, could keep the economy on the fast track for at least 15 to 20
years." Wei Houkai, director of the center for China's
regional development at the Chinese Academy of Social Sciences (CASS)
India
“Every major industrialized country in the world has
experienced a shift over time from a largely rural agrarian-dwelling
population to one that lives in urban, nonagricultural centers. India will be
no different. However India’s urbanization will be on a scale, that
outside of China, is unprecedented.” McKinsey Global Institute’s
report India’s Urban Awakening
India
has 1.2 billion people and the second largest urban system in the world -
currently 340 million people.
Less
than 60 percent of the households in India’s cities have sanitation
facilities, and less than half have tap water on their premises.
The
share of the urban population in India is expected to reach 40% by 2021, and
by 2011, urban areas could contribute around 65% of GDP.
A
report done by the McKinsey Global Institute called India Urban Awakening predicts
that 590 million people or 40% of the population will live in cities by 2030
up from 340 million today. By that time, Asia’s third largest economy
would have 68 cities with populations over 1 million, up from 42 today.
With
less than 1/3 of the population India’s urban areas generate over 2/3
of the country’s GDP and account for 90% of government revenues.
Scrap Copper
People have been using copper for over 10,000 years and
recycling (it can be recycled without any loss of chemical or physical
properties) almost as long - it has been estimated that at least 80% of all
copper ever mined is still in existence.
Unfortunately:
“Indications are that demand in Europe, the US and Japan
is holding up well and scrap has
become very tight." Barclays Commodities Research analysts
“Scrap (supply) is tight.” Edward Meir, analyst with MF
Global
“There is little information regarding this market
(talking about the scrap market); however, it has not been a decisive factor
either for the demand or supply side of the copper market.” Juan Villarzu, former head of world’s largest copper
company, Codelco
Conclusion
This
author believes that the US and Europe are, or are in the process of
becoming, mostly irrelevant when it comes to the demand side of the copper
supply equation. Increased demand for the red metal in developing nations
will more than make up for decreased demand in the western world. And when
western economies recover, as they eventually must, then the supply squeeze
will become even tighter.
The
citizens of the worlds developing nations aspire to have what we have, the
ease of travel, home phones, electricity, central plumbing, heating and air
conditioning, cars, toys, consumer electronics and home appliances.
When
you consider the recent lack of exploration spending, increasing demand from
developing countries, country risk (the Democratic Republic of the Congo, the
DRC, comes to mind) declining resources/grades at the world's largest copper
mines and that a sufficient number of new deposits that have been found are
not being brought on stream in a timely enough fashion - and those that are,
carry, for the most part, much lower grades than those presently being mined
then you might be forgiven for coming to the same conclusion that I have -
growth in global copper demand, at the same time supply is declining, seems
likely.
China
alone has one fifth of the world’s population, India another 1.2
billion people, most of them want the same quality of living and level of
consumerism and materialism we enjoy in the west.
Could copper come
into a major demand squeeze? Is the red metal on your radar screen?
If not, maybe it
should be.
Richard Mills
Aheadoftheherd.com
Richard is host of www.aheadoftheherd.com and invests in the
junior resource sector. His articles have been published on over 60 websites
including - Wall Street Journal, 24hGold, Kitco, USAToday, Safehaven,
SeekingAlpha, The Gold/Energy Reports, Gold-Eagle and Financial Sense. If
you're interested in learning more about specific junior gold/silver stocks
and the junior resource market in general please come and visit his site at
www.aheadoftheherd.com
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