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Michael Lampard
In the September quarter 2009, copper prices averaged US$5630 a tonne, an increase of 20 per cent on the June quarter. Since September, copper prices have strengthened further trading in a range of US$6000 to US$7000 a tonne. Contributing to higher copper prices have been expectations of improving copper demand in developed economies as a result of the improved outlook for OECD economies. Given the low prices recorded in the first half of the year, the copper price is estimated to average around US$5085 a tonne in 2009, 27 per cent lower than in 2008.
Chinese imports of refined copper have increased year on year by almost 150 per cent, to 2.7 million tonnes in the first 10 months of 2009. A number of factors have contributed to increased copper imports: China’s large fiscal stimulus package, stock building by China’s Strategic Reserve Bureau, producer restocking, reduced availability of copper scrap and a positive price differential between the Shanghai Futures Exchange and the London Metal Exchange in the first half of 2009. China’s increased demand for refined copper has been a significant factor in the strong rise in copper prices over the course of 2009.
Copper prices are forecast to average around US$6750 a tonne in 2010, 33 per cent higher than in 2009. An assumed gradual recovery in OECD economic growth and, thus, demand for copper will be critical to the price outcome. Increased copper demand from developed economies is forecast to be partially offset by expected lower apparent copper consumption (production plus net imports minus reported stock changes) in China. China’s apparent copper consumption is forecast to decline modestly in 2010 as an end to producer stock building is expected to more than offset the demand effects of increased consumption of copper.
Considerable uncertainty remains regarding the extent to which producer restocking has occurred in China. It is estimated that Chinese producers have stockpiled up to 1.2 million tonnes of refined copper over the course of 2009. If significant private stock building has also occurred, the extent to which these stocks are drawn down through the course of 2010 presents a risk to the price forecast. If stocks are drawn down faster than assumed, China’s import demand for copper could be lower than forecast, placing significantly more downward pressure on prices. Alternatively, if producer stocks are not drawn down as fast or stock building is not as large as assumed, China’s import demand for refined copper may be higher in 2010, possibly resulting in higher than forecast world copper prices.
The pace of world economic recovery in 2010, especially in major OECD economies, is another key risk factor associated with the copper price forecast. If economic growth recovers faster than currently assumed, world copper demand, and therefore prices, could be higher than currently forecast. Alternatively, if economic growth in key copper consuming nations proves to be weaker than currently assumed, copper prices could average significantly lower than currently forecast.
Apparent consumption
Measuring consumption is difficult for some commodities as countries have limited capacity to collect and report consumption data in a timely manner. As a result, apparent consumption, rather than actual consumption, is commonly used as an approximation. A country’s apparent consumption is its domestic production plus net imports minus reported stock changes. It therefore represents the volume available for consumption adjusted for reported stock changes. Although apparent consumption is a good approximation of actual consumption, it is subject to many measurement errors. For example, unreported changes in stocks, either at the retail or wholesale level, can result in large differences between apparent consumption and actual consumption.
Copper consumption is estimated to remain little changed at around 18.1 million tonnes in 2009, as increased apparent consumption in China has been offset by falling consumption in other major copper consuming economies. In 2010, growing demand for copper in developed economies is forecast to more than offset the effect of an end to producer restocking in China. World copper consumption is forecast to increase slightly to 18.3 million tonnes in 2010.
For 2009 as a whole, China’s apparent consumption of copper is forecast to increase by around 35 per cent to 6.9 million tonnes. China’s fiscal stimulus package has supported copper consumption in 2009 with significant expenditure on copper intensive infrastructure, such as public sector construction and electrical distribution networks. The fiscal stimulus package has also coincided with significant growth in the production of key copper intensive consumer durables such as automobiles, freezers, refrigerators and air conditioners. Unreported changes in producer stocks are also thought to have contributed to the significant increase in China’s apparent copper consumption in 2009.
In 2010, China’s consumption of copper is forecast to increase in line with continued urban infrastructure spending and a recovery in export demand for copper intensive goods. Nevertheless, China’s apparent consumption of copper is likely to decline moderately in 2010, as both reported and unreported stock building in 2009 is not expected to continue.
Copper consumption in OECD economies is estimated to decline by 16 per cent to around 7.3 million tonnes in 2009. Lower copper consumption reflects reduced construction and manufacturing activity as a result of declining economic activity in most OECD economies.
In the United States, the world’s second largest copper consumer, copper consumption is estimated to decline by 17 per cent to around 1.7 million tonnes in 2009. Lower copper consumption is partially attributable to declining construction activity and lower production of consumer durables. In October 2009, US housing starts and housing permits, two leading indicators of construction activity, remained low, while production of consumer durables, which tend to be copper intensive, declined by 8 per cent year on year.
Reflecting assumed weakness in key copper consuming sectors of the US economy, US copper consumption is forecast to remain relatively weak into the early part of 2010. However, an assumed strengthening in US industrial production and economic growth in the latter part of 2010 is forecast to result in increased construction activity and production of copper intensive goods. Reflecting this, US copper consumption is forecast to increase by 6 per cent to around 1.8 million tonnes in 2010.
For the OECD as a whole, an assumed improvement in economic activity, particularly in industrial production, is forecast to result in copper consumption increasing by 12 per cent to 8.2 million tonnes in 2010.
Mine production is estimated to increase slightly to around 15.8 million tonnes in 2009, as increased production in Indonesia and Africa is partially offset by lower production in Canada, Australia and the United States. In Indonesia, mine production is estimated to increase by around 330 000 tonnes, reflecting the intersection of higher grade ore at Freeport’s Grasberg mine and improved metal recovery at Newmont’s Batu Haiju mine. In Africa, mine production is estimated to increase by around 160 000 tonnes to 1.2 million tonnes, primarily reflecting the start-up of Freeport’s Tenke-Fungurume mine in the Democratic Republic of Congo and Equinox Minerals’ Lumwana mine in Zambia. Offsetting some of this growth is lower production at Vale’s Canadian copper operations following industrial disputes in the third quarter of 2009. Also in North America, production in the United States is estimated to decline by around 6 per cent, primarily reflecting lower output at Phelps Dodge’s Morenci mine and BHP Billiton’s Pinto Valley operation.
In 2010, world mine production is forecast to increase by 2 per cent to 16.2 million tonnes as production in Africa, Chile and Australia increases. In Africa, mine production is forecast to increase to around 1.4 million tonnes, as Vedanta’s Konkola Deep mining project in Zambia enters production and operations started in 2009 approach full capacity. In Chile, production is forecast to increase by 6 per cent to around 5.8 million tonnes as the Escondida, Codelco Norte and Candelaria mines return to full production and expansions at Pelambres and Collahuasi are completed. Australian mine production in 2010 is forecast to increase by 15 per cent as production from Oz Minerals’ Prominent Hill and Newmont’s Boddington gold mine offset lower production from BHP Billiton’s Olympic Dam. Some mines which closed in 2008 as a result of low prices are expected to reopen during the course of 2010. This is also expected to lead to increased world mine production.
Refined production of copper is estimated to decline by 1 per cent in 2009 to around 18.3 million tonnes. Weak demand and low profit margins in the European Union and most developed economies have resulted in lower refined primary production in these economies. In addition, secondary refined production of copper is estimated to decline by around 4 per cent in 2009 as reduced scrap availability in the first half of 2009 limited production.
Helping to offset these production declines was the start-up of Solvent Extraction Electrowinning (SX-EW) operations in Africa and Europe. These include the commissioning of Tenke Fungurume in Africa and Las Cruces in Spain.
In 2010, refined copper production is forecast to increase by 1 per cent to 18.5 million tonnes as both primary and secondary refined copper production increases. Primary refined copper production is forecast to increase by 1 per cent, primarily reflecting increased SX-EW production in Africa and Europe as capacity commissioned in 2009 continues to increase production. An expected increase in the availability of scrap in 2010 is also forecast to lead to increased production of secondary refined copper.
Australian copper mine production is forecast to decline in 2009-10, as increased production at some operations is expected to be offset by a production disruption at BHP Billiton’s Olympic Dam. In October 2009, a mechanical failure in the prime haulage shaft at Olympic Dam occurred. The shaft, which transports 75 per cent of the mine’s ore to the surface, is currently being repaired and is not expected to be fully operational until the March quarter 2010. As a result of this incident, production at the mine may be up to 70 000 tonnes lower than previously forecast in 2009-10. Helping to offset this lost production is expected higher output at Newmont’s recently started Boddington gold mine and a full year’s production at Oz Minerals’ Prominent Hill operation.
Lower forecast output at Olympic Dam and the continued closure of some SX-EW capacity is forecast to result in refined production declining by around 18 per cent to 408 000 tonnes in 2009-10. If realised, this will be the lowest refined copper production recorded in Australia since 1998-99.
Reflecting forecast lower production, the metallic content of copper exports is forecast to decrease by around 11 per cent to 753 000 tonnes in 2009-10. Refined copper exports are forecast to account for most of this decline, with export volumes falling by around 28 per cent to 261 000 tonnes.
Australia’s copper export earnings are forecast to increase by 6 per cent to nearly $6.2 billion in 2009-10. This reflects forecast higher average prices more than offsetting the effect on earnings of lower export volumes and an assumed appreciation of the Australian dollar.
Copper outlook |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
2008 |
2009 |
f |
2010 |
f |
% change |
|||||
| World | ||||||||||
| Production | ||||||||||
| – mine | kt |
15 529 |
15 804 |
16 152 |
2.2 |
|||||
| – refined | kt |
18 484 |
18 307 |
18 490 |
1.0 |
|||||
| Consumption | kt |
18 102 |
18 141 |
18 286 |
0.8 |
|||||
| Closing stocks | kt |
808 |
975 |
1 179 |
20.9 |
|||||
| – weeks consumption | 2.3 |
2.8 |
3.4 |
21.4 |
||||||
| Price | US$/t |
6 976 |
5 085 |
6 745 |
32.6 |
|||||
USc/lb |
316.4 |
230.7 |
305.9 |
32.6 |
||||||
|
||||||||||
2007-08 |
2008-09 |
2009-10 |
f |
|||||||
| Australia | ||||||||||
| Mine output | kt |
863 |
890 |
875 |
– 1.7 |
|||||
| Refined output | kt |
444 |
499 |
408 |
– 18.2 |
|||||
| Exports | ||||||||||
| – ores and concentrates | kt |
1 694 |
1 801 |
1 820 |
1.1 |
|||||
| – refined | kt |
296 |
361 |
261 |
– 27.7 |
|||||
| – total value | A$m |
6 730 |
5 835 |
6 157 |
5.5 |
|||||