As a general rule, the most successful man in life is the man who has
the best information
Fact - China is the world’s largest user of copper.
Copper is critical for China and the country has imported unbelievable
tonnages over the years, but according to the copper bears the story could be
coming to an end.
There are several reasons investors might question the longevity of
China’s copper story:
- Concerns
about weak global growth, investors are worried about China’s
exports slowing and its implications for industrial metal demand
- China
is thought to have high inventory levels of copper
- China’s
economic growth has slowed to a three year low of 7.6 percent
- Surplus capacity
- Extraordinarily
tight cash
According to the Beijing Antaike Information
Development Co. copper consumption is expected to expand this year at the
slowest rate since 1997.
Copper Market
“This lack of inventory growth is the hardest indicator that
there has neither been a significant negative shock to demand nor a
pronounced destocking cycle.”Andrew Keen, Head of Metals and Mining Equity Research for
Europe, the Middle East and Africa, CNBC’s Asia Squawk Box
According to the International Copper Study Group (ICSG):
“The apparent refined copper balance for the first half 2012
indicates a production *deficit of 473,000 t (a seasonally adjusted deficit
of 292,000 t)…As of the end of August, copper stocks held at the major
metal exchanges (LME, COMEX, SHFE) totaled 434,277 t, a decline of 110,334 t
from stocks held at the end of December 2011 and a decrease of 14,520 t from
stock levels at the end of July 2012.”
*In September, the ICSG projected that global refined copper demand in
2011 would exceed refined copper production by about 200,000 tons, continuing
the production deficit experienced in 2010.
The World Bureau of Metal Statistics said that from January to June
2012 worldwide copper demand surpassed production by 129,000 tons.
Also, according to ICSG Copper Market Forecast 2012-2013, in 2012,
world refined copper production is projected to increase by only about 2.5%
to reach 20.15 million metric tonnes (mmt). Global Industry Analysts Inc. forecasts that the
global market for copper is projected to reach 27.5 mmt
by the year 2017.
The world will need 7.35 million metric tonnes
or 1.47 million metric tonnes of new copper
production per year for the next five years to meet anticipated demand. How
much copper is that? Thanks to about.com let’s look at copper
production figures for 2010 from the world’s top copper miners.
Codelco - the Corporación
Nacional del Cobre de
Chile – controls about 20 percent of the world's reserves of copper. In
2010, Codelco produced approximately 1.76 million
metric tons of refined copper, about 11% of total world copper production.
Freeport-McMoRan Copper & Gold Inc. (FCX) is the world's largest
publicly traded copper producer. The company's assets include Grasberg, the
world’s largest copper and gold mine in terms of recoverable reserves.
FCX produced 1.44 million metric tons (mt) of
refined copper in 2010, equal to 9% of the world total.
Xstrata Plc’s copper production
in 2010 was over 900,000 metric tons, Rio Tinto
produced approximately 700,000 t of copper, Anglo American 645,000 t, Groupo Mexico 645,000 t, Glencore
542,000 t, Southern Copper 542,000 t and KGHM Polska
Miedz at 425,000 t.
FCX is the world’s largest publicly traded copper producer
– 1.44 million metric tonnes of copper per
year, the worlds going to need 1.47 million metric tonnes of new copper production per year, is another
Freeport out there? Perhaps another Glencore,
Southern Copper and KGHM will be built each year?
China’s Copper Market
According to Beijing Antaike, the state run
nonferrous metals consultancy, Chinese copper consumption was up 7.8 percent
in 2011 to 7.33 mt, is expected to grow 5.9 percent
to 7.76 mt in 2012 and to reach 10 mt per year by 2020.
Currently there is an estimated two million metric tons of copper in
China’s warehouses.
“That has to be put in context that over the next 5 years, China
will probably consume 50 million tons of copper. So there is a major
strategic shortfall in the copper market from a Chinese perspective and those
warehouses are really part of that longer-term solution…We don’t
think it’s a big problem for the copper market going forward.”Andrew Keen
Let’s consider Chinese copper inventories from another
perspective – 2011’s 7.33 mt of copper
usage works out to 20,082 tonnes a day, so two
million tonnes of copper is 99 days of inventory
– just three months worth of copper, two
million tonnes for a country that, even if copper
usage does not grow another tonne, will use 36.65 mt over the next five years, remember no one is
forecasting Chinese copper consumption to stop growing, just slowing to
between 2-4 percent growth.
At the end of August, copper stocks held at the major metal exchanges
(LME, COMEX, SHFE) totaled 434,277 t.
Also consider:
“A market can appear to be in a deficit and a surplus
simultaneously because economic forecasts only look at production and demand
for the calendar year and exclude excess stocks carried over from the past.
The current oversupply – high inventory levels - are a consequence of
the economic conditions of the last three years, current and future supply
deficits will be strong enough to digest that oversupply.
As much as one million metric tons of surplus isn't available for
sale, it has to be part of the ebb and flow of moving copper down the line to
the ultimate end product
Up to 600,000 metric tons is kept as China's rainy-day fund.” - Justin Lennon, metals analyst,
Mitsui Bussan Commodities
The impact of a build-up of inventory due to Chinese rail delays
– there was a build-up of goods in transit due to transport delays on
Chinese railways - sales of copper cathode were slowed.
The outgoing Chinese government bosses, while waiting for a leadership
change set for November 2012, are trying to prevent expansion from slipping
below the 7.5 percent target set in March of this year.
China's powerful economic planning body, The National Development and
Reform Commission (NDRC), announced approvals for 60 infrastructure projects
worth more than $150 billion.
The new Chinese leaders are expected to introduce more policies to
support the economy.
"Losses in base metal prices will be capped despite weak
fundamentals and global economic worries, as investors expect Beijing to do
the necessary fine-tuning to stabilise the economy
before the 18th Communist Party Congress." CIFCO Futures analyst Zhou Jie, referring to China's leadership transition event
scheduled on Nov. 8.
Demand/Consumption
Two factors are involved in increasing consumption. One is the growth
in population:
2011 7 billion
2020 7.6 billion
2027 8 billion
2030 8.2 billion
2040 8.8 billion
2046 9 billion
2050 9.2 billion
The second factor is the growth in wealth in the major developing
countries - China, India, Africa and Indonesia have enormous numbers of
people who are already middle class and hundreds of millions still to become
middle class.
According to the UN report “RESILIENT PEOPLE RESILIENT PLANET A
Future Worth Choosing” the number of middle-class consumers will
increase by three billion people over the next 20 years.
Copper consumption in developed countries remains stagnant but the
appetite for copper in developing countries is growing at an astonishing
pace.
The annual per-capita consumption of copper in India is 0.47 kg.,
China's is 5.4 kg. and the world average is 2.7 kg.
North American consumers use about 10kg of copper per capita. As China
undergoes massive urbanization, builds its infrastructure and becomes more of
a consumption orientated society, more like the west, copper consumption will
start to approach North American levels. Because of the huge population
differences between East and West just a slight increase in Asian and Indian
consumption will translate into enormous demand growth.
"From a copper-specific perspective, we believe global copper
consumption growth will continue to be underpinned by continued robust growth
in completions until at least late 2013. This growth in completions is set to
be complemented by a forecast pick up in property sales in 2013; higher
property sales are associated with higher consumer appliance related copper
demand. Together, these findings represent the backbone of our constructive
view on copper over the next 6-12 months. The current wave of construction
projects in China originated with the implementation of a stimulus package in
2009. Internal and external copper wiring (connection to grid) tends to be
installed around project completion, and can account for as much as 50% of
Chinese copper consumption. The construction cycle for the first wave of
projects launched in 2009-2010 are now in their late stages, resulting in a
sharp fall in new projects and rising building inventories.
A second wave of projects has started to gain momentum; "This
second wave has yet to crest, underpinning global growth in 'late-cycle'
assets or finishing commodities such as copper and aluminum.”
Goldman Sachs analysts
Supply
The copper market is already in deficit as miners struggle with
operational and labor problems and LME copper stocks are strongly held.
Lets state the obvious:
- For
over the last ten years supply has struggled to keep pace with demand
- Metal
supply is finite and subject to compounding demand from developing
nations
- Metal
production is highly cyclical, with intermittent peaks and troughs which
are closely linked to economic cycles - declining production has
historically been driven by falling demand and prices, not by scarcity
- Rates
of production and amounts of reserves continually change in response to
movements in markets and technological advances
- Most
mineral resources will not be exhausted in the near future
- If
energy was cheap and unlimited then recoverable resources would be
unlimited
But
- Discovery
and development is increasingly becoming more challenging and expensive
- Average
ore grades are in decline for most minerals, yet production has
increased dramatically
- Our
most important metals are suffering from declining ore quality and
rising extraction (ore is a different and inferior chemical or
structural composition) costs
- Our
prosperity has always been based on the fact that producing resources
yielded more resources than it cost. However the cost of *energy is
climbing, the amount used is climbing but the returns from energy expended
is declining. Eventually the quantity of resources used in the
extraction process will be 100% of what is produced
- Most
older existing mines, the foundation of our supply, have increasing
costs with production rates stagnating or even declining
- The
rate of discovery is not keeping pace with the rate of depletion, let
alone being higher
*Energy can be thought of as a proxy for labor, materials, energy and
externalities – environmental, community impact etc.
The metal content of copper ore has been falling since the mid 1990s. A miner now has to dig up an extra 50 percent
of ore to get the same amount of copper. As grade drops the amount of rock
that must be moved and processed per tonne of
produced copper rises dramatically – all the while using more energy
that costs several times more than it use to. With
the lower grades of ores now being mined energy becomes more and more of a
factor when considering economics.
“We took the nice, simple, easy stuff first from Australia, we
took it from the U.S., we went to South America. Now
we have to go to the more remote places.” Glencore
CEO, Ivan Glasenberg in the Financial Times
describing why his firm operates in the Congo and Zambia
Conclusion
China has recently, and for the first time ever, revealed the size of
its *copper inventories - and they **scared the hell out of investors when
they did it.
*China's Non-Ferrous Metals Industry Association announced that the
country's copper inventories were at about 1.9 million tons at the end of
2010.
**The International Copper Study Group had their published number at
up to 1.5 million tons, no one was too worried about 1.5 mmt’s
at the time but add another 400,000 t’s today…
If you were a buyer - and at 40% of world usage China is THE big buyer
– and you needed stock would you want lower or higher prices?
Remember, a Chinese copper buying spree in early 2009 triggered a
price rally from the lows of the financial crisis to new records above
$10,000 a tonne.
Do you think China might have an interest in inflating the size of its
stockpiles to push prices down? And really, does it matter if they have two
million tonnes or three million tonnes
today?
“Whatever the Chinese say that stocks are, in the end they still
need copper.” George Cheveley, metals and mining
portfolio manager at Investec Asset Management
Tomorrow they need more, a whole lot more, even if future economic
growth “only” clocks in at an annual 7.5 percent compounded.
“over the next 5 years, China
will probably consume 50 million tons of copper. So there is a major
strategic shortfall in the copper market from a Chinese perspective”
Are Copper Shenanigans, and the investment
opportunities presented, on your radar screen?
If not, maybe they should be.
Richard
(Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com
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is the owner of Aheadoftheherd.com and invests in the junior
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