Interesting article today Copper miners look past present pain to future gain
By Xan Rice in Santiago
These are tough times in the copper world. Prices have fallen nearly 10 per cent in 2014, testing four-year lows. Meanwhile, the long-awaited global surplus of refined metal is mounting. So why is the gloom lifting among miners?
“Short-term pain, long-term gain?” – the title of one of the main presentations at the annual copper conference in Chile – offered a hint: better days surely lie ahead.
Several key reasons to be positive emerged from Cesco week in Santiago. First, the plunge in prices is no disaster. Some small, high-cost producers may be struggling, but the industry’s healthy margins mean larger miners and producers remain comfortable.
“The big companies are still making money,” says Colin Hamilton, metals analyst at Macquarie. “And I think we have passed the point of maximum pessimism.”
Stefan Boel, a board member at Aurubis, the European smelter and manufacturer of copper products, agrees, noting that demand for wire rod has risen by up to 5 per cent year on year in Europe. “We have not seen that for a long time,” Mr Boel says. “I struggle to find reasons why prices should go down further.”
Perspective is also needed about the surplus. Thanks to the commissioning of new projects and mine expansions, the refined copper market is oversupplied. But the size of the forecast surplus – less than 500,000 tonnes at its peak in 2016 – is small, representing only about 2 per cent of current global consumption. And it will be short lived. Towards the end of the decade, the market will swing back into deficit, with the supply gap quickly widening.
Few people dispute this because the maximum output over the next decade can be reasonably accurately forecast; it takes, on average, 11 years for a copper mine to go from conception to production. “There is a wonderful opportunity for those well placed to fill that [supply] gap,” says Peter Beaven, president of copper at BHP Billiton. “There is a prize to be won.”
But will the engineers be given the budget to go for it? Miners remain in shareholders’ bad books. Hennie Faul, chief executive of copper at Anglo American, says although mining companies are “running hard just to stand still” because of declining ore grades, past profligacy means obtaining board approval for new projects will be difficult. “Investors have lost faith in us,” Mr Faul says. Exploration budgets have been slashed.
The influence of China on the copper market is another hot topic. For the next decade, the increase in Chinese demand could average 3.5 per cent a year, according to CRU, the commodity consultants, compared with 11 per cent annually over the past 10 years. This may sound worrying for producers, given that China accounts for more than 40 per cent of global demand, but it should not be, says Vanessa Davidson, CRU’s group manager for copper.
“In terms of consumption, China has reached a critical mass where even a slower growth rate is going to generate a decent volume increase.” With the larger base and the recovery in developed markets, world copper consumption is expected to increase by 7m tonnes over the next 10 years, compared with the 5m tonnes increase since 2004.
The copper financing deals in China that helped cause this year’s sell off are neither dead nor a major threat to the market, according to Max Layton, of Goldman Sachs. He estimates about 600,000 tonnes of copper in Chinese warehouses serves as collateral and says these arbitrage deals remain profitable.
His worry is less about these deals suddenly unwinding than the slowdown in copper use in construction in China. “I’m cautious on the next 12 to 18 months,” Mr Layton says. “But I totally agree with the long term bull story [for copper].”
The country will also become an increasingly important producer of scrap – the raw material for about a fifth of total refined copper supply. The vast majority of scrap currently comes from mature economies, where existing buildings are gutted to make way for new ones, and consumers upgrade cars and electrical appliances. China has not yet reached that stage, but soon will.
“Over the next five to 10 years there will be exponential growth in scrap from China as people get wealthier,” says Michael Lion, Asia chairman for Sims Metals Management, the world’s largest listed metals recycler.
There is one cloud hanging over the long-term outlook for copper: aluminium. The contrasting performances of copper and aluminium over the past decade – the red metal is up 319 per cent per cent, versus 40 per cent for the light metal – means increasing numbers of companies and governments are looking more favourably at aluminium for cabling, says Christophe Allain, corporate purchasing director at Nexans, the French cable manufacturer.
“Be sure, there will be substitution and it will have an impact on overall copper demand in the world.”