Copper

Michael Lampard

World spot copper prices averaged US$3840 a tonne in the first five months of 2009, a decline of 45 per cent on the 2008 average price of US$6976 a tonne. However, the copper price increased by nearly 90 per cent from its low in December 2008, to US$5240 a tonne in early June. The sharp rise in copper prices during the first half of 2009 is largely attributable to a significant increase in China’s demand for refined copper and the closure of mine capacity in late 2008.

In the first five months of 2009, China imported 1.4 million tonnes of refined copper, which was an increase of 130 per cent compared with the same period last year. China’s imports of primary refined copper have been supported by a range of factors including: the Chinese Government’s US$586 billion stimulus package; reported strategic stock building by the State Reserves Bureau; reduced scrap availability; and a positive arbitrage between the Shanghai Futures Exchange and the London Metals Exchange.

Given the large forecast contraction in non-Chinese copper demand during 2009, copper prices in the second half of this year are likely to remain dependent on growth in China’s refined copper imports.

Chinese demand supporting prices in 2009 and 2010

For 2009 as a whole, world copper prices are forecast to average US$4416 a tonne, a decline of 37 per cent relative to 2008. The fall in prices reflects sharp contractions in global copper demand and the associated increase in world stocks to around 5 weeks of consumption.

In 2010, the world copper price is forecast to increase by 24 per cent to average $5488 a tonne, as an expected increase in copper demand leads to declining copper stocks. At present, there is a significant amount of idled copper production capacity, which could be restarted relatively quickly in the event of sustained higher prices. As a result, the rate at which idled capacity is restarted represents a risk to this price forecast. A quicker and larger than forecast restart of idled capacity could place downward pressure on prices.

Global copper demand to contract in 2009 before increasing in 2010

World copper consumption is forecast to decline by around 4 per cent in 2009 to 17.2 million tonnes, as world economic activity contracts. Excluding China, world copper consumption is forecast to fall by 12 per cent to 11.3 million tonnes in 2009. In 2010, global refined copper consumption is forecast to increase by 7 per cent to 18.4 million tonnes, as copper consumption increases in most developed economies reflecting an assumed gradual improvement in economic growth.

China’s demand to remain strong

In the first three months of 2009, China’s apparent consumption of refined copper increased by 33 per cent year on year. China’s stimulus package, which targeted infrastructure development, has increased demand for copper for use in electrical distribution networks, and residential and commercial construction. For 2009 as a whole, China’s copper consumption is forecast to increase by 15 per cent to nearly 6 million tonnes, as construction activity remains strong and strategic stock building continues throughout the year. Reduced availability of copper scrap is also likely to support Chinese consumption of refined copper in 2009. In the past few years, China has imported large volumes of copper scrap for reprocessing into secondary refined copper for domestic consumption. In the first five months of 2009, China’s imports of copper scrap declined by 40 per cent year on year. With scrap availability likely to remain constrained in 2009, continued substitution of refined copper for copper scrap is likely to occur.

China’s copper consumption is forecast to continue to grow in 2010 as construction of urban infrastructure, such as buildings and electrical grids, continues and export demand for copper intensive goods increases associated with a recovery in OECD economies.

OECD consumption to decline in 2009

OECD consumption of refined copper in 2009 is forecast to fall by 12 per cent to 7.7 million tonnes before increasing in 2010 to 8 million tonnes. Demand for refined copper in OECD countries is forecast to remain weak throughout 2009 and into 2010, as reduced construction activity lowers copper consumption. In 2009, OECD countries forecast to have the largest declines in copper consumption include France, Germany, the Republic of Korea, Canada and the United States.

In the United States, the world’s second largest copper consumer, consumption is forecast to decline by 12 per cent as demand for residential construction and household appliances continues to decline. Housing permits, a leading indicator of future residential construction, reached an historic low in 2009, declining 49 per cent year on year in the first four months of 2009. During 2009, US housing starts and permits are expected to remain at low levels, placing downward pressure on US copper demand.

In 2010, copper consumption in the United States is forecast to increase by 3 per cent to 1.8 million tonnes, when an assumed recovery in the housing market and domestic demand for copper intensive goods begins.

Mine production to increase in 2009 and 2010

In 2009, world copper mine production is forecast to increase by 1 per cent to 15.7 million tonnes, reflecting increased production in Africa, Indonesia and Australia. In Africa, mine production is forecast to increase by 18 per cent to around 1.2 million tonnes, supported by the start-up of Equinox Minerals’ Lumwana mine (170 000 tonnes) in Zambia and Freeport’s Tenke-Fungurume mine (110 000 tonnes) in the Democratic Republic of Congo in the first quarter of 2009. Production at Freeport’s Grasberg mine in Indonesia is expected to increase in 2009 and 2010 by around 100 000 tonnes, as the mine processes higher grade ore. Also in Indonesia, Newmont’s Batu Hijau operation is expected to increase production by more than 50 000 tonnes in 2009, reflecting increased mill availability and higher ore grades. In Chile, the world’s largest copper producer, mine production in 2009 is forecast to decline slightly to around 5.2 million tonnes. Lower production at Escondida, as a result of equipment failure, is expected to more than offset increased production at Codelco’s Norte Division.

In 2010, world mine production is forecast to increase by 3 per cent to 16.1 million tonnes as a number of new projects commence operations. The largest of these projects include Xstrata’s El Teniente expansion (100 000 tonnes) in Chile and Vedanta’s Konkola Deep mining project (150 000 tonnes) in Zambia. Production is also forecast to be higher, as a number of mines closed in 2008 as a result of low prices are expected to reopen.

Refined production to decline in 2009 but increase in 2010

World refined copper production is forecast to decline by 2 per cent to 18 million tonnes in 2009, reflecting lower Solvent Extraction Electrowinning (SX-EW) production and a reduction in secondary refined production because of reduced availability of scrap. Despite production remaining flat at around 3.8 million tonnes in 2009, China is forecast to remain the world’s largest producer of refined copper. In the European Union and most developed economies, refined production is forecast to remain steady as weak local demand and low profit margins constrain production. Pressure on the profitability of refineries remains as low spot treatment and refining charges (the payment received by refineries for refining copper) have coincided with falling world sulphur prices (sulphur is a by-product of the smelting process). In 2009, the most significant increases in world refining capacity are forecast to come from Africa where the commissioning of Freeport’s Tenke Fungurume operation is expected to add around 110 000 tonnes to SX-EW capacity.

In 2010, refined production is expected to increase by 2 per cent to 18.4 million tonnes, as an increase in demand for refined copper supports higher production. Increased refined production is forecast to come from the restarting of small SX-EW operations, closed as a result of low prices, and increased secondary refined production as higher prices lead to an increased availability of copper scrap.

Australian production to increase

Australian mine production is estimated to have increased by 4 per cent in 2008-09 as higher production at BHP Billiton’s Olympic Dam offset mine closures late in 2008. Closures included Compass Resources Browns Oxide SX-EW (10 000 tonnes), Barminco’s Eloise (16 000 tonnes), Matrix Metals’ Leichhardt SX EW (9000 tonnes) and CopperCo’s Lady Annie SX-EW (20 000 tonnes). Despite significant closures to Australia’s SX-EW capacity in 2008-09, refined production is estimated to have increased by 11 per cent to 494 000 tonnes, reflecting higher production at the Townsville Copper Refinery and increased production at SX-EW operations in the first half of the financial year, prior to their closure.

In 2009-10, copper mine production is forecast to increase by 13 per cent to 1 million tonnes, attributable to new production at Oz Minerals’ Prominent Hill mine and Newmont’s Boddington gold mine.

Refined production is forecast to decline by 6 per cent to 467 000 tonnes in 2009-10, reflecting lower SX-EW production as a result of closures of capacity in 2008.

The metallic content of copper exports is estimated to have increased by 16 per cent to 831 000 tonnes in 2008-09. This reflects a significant increase in both refined copper and copper concentrate exports. In 2009-10, the metallic content of exports is forecast to increase by 3 per cent to 857 000 tonnes as increased concentrate exports compensate for lower refined exports.

Export earnings to increase in 2009-10

Australia’s export earnings from copper are estimated to decrease by 19 per cent to $5.5 billion in 2008-09. This fall in export earnings has occurred as an increase in export volumes and a sharp depreciation of the Australian dollar have been offset by a significant decline in world copper prices. An increase in both export volumes and prices in 2009-10 is forecast to result in a 2 per cent increase in copper export earnings, to $5.6 billion.

Copper outlook
			2008	2009	f	2010	f	% change
World
Production
– mine		kt	15 556	15 672		16 148		3.0
– refined		kt	18 475	18 018		18 435		2.3
Consumption		kt	18 032	17 235		18 382		6.7
Closing stocks		kt	808	1 591		1 643		3.3
– weeks consumption			2.3	4.8		4.6		– 4.2
Price		US$/t	6 976	4 416		5 488		24.3
		USc/lb	316.4	200.3		248.9		24.3
			2007-08	2008-09	s	2009-10	f
Australia
Mine output		kt	863	901		1 017		12.9
Refined output		kt	444	494		467		– 5.5
Exports
– ores and concentrates		kt	1 694	1 778		2 039		14.7
– refined		kt	296	351		307		– 12.5
– total value		A$m	6 730	5 452		5 568		2.1