abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Copper

Outlook to 2013-14

Michael Lampard

In 2008, the copper price averaged US$6951 a tonne, 2 per cent lower than in 2007. Despite this modest decline, movements in the copper price were volatile in 2008 with prices increasing to nearly $US9000 a tonne in July before falling more than 65 per cent to finish the year trading below $US3000 a tonne. Prices were supported in the first half of the year by concerns over adequate mine supply. However, in late 2008 falling demand as a result of the global financial crisis increased stocks and put significant downward pressure on prices.

Prices to average significantly lower in 2009…

The copper price is forecast to average significantly lower in 2009 as global copper consumption contracts for the first time in three years. Accompanying this contraction, world refined production is also expected to fall as mine production cuts caused by both technical constraints (low ore grades and equipment failure) and sharply lower prices limits growth. In all, copper stocks are forecast to increase to 3.2 weeks of consumption in 2009, supporting a 52 per cent fall in the average copper price to US$3330 a tonne.

…before increasing over the medium term

In 2010, the copper price is projected to average higher as global consumption begins to increase in line with an assumed improvement in world economic growth. This trend is likely to continue until 2012 when prices in real terms (in 2009 dollars) are projected to peak at around $US5300 a tonne. For the remainder of the outlook period, prices are expected to gradually ease as strong growth in mine supply results in increased stocks. The copper price is projected to end the outlook period trading around $US4300 a tonne (in 2009 dollars).

Economic growth in key copper consuming nations such as China, the United States, Japan and Germany will be a key factor influencing movements in the copper price over the medium term. However, there is also considerable uncertainty surrounding the outlook for mine production. A major risk factor is associated with the degree to which current credit constraints limit existing and future mine developments. If access to credit continues to remain constrained in an extended period, it would have the potential to adversely affect mine production over the next several years.

Consumption to fall in 2009…

In 2008, global copper consumption increased by around 0.5 per cent to 18.1 million tonnes. Growth in copper consumption was weak reflecting high prices in the first half of the year and reduced demand as a result of lower world economic growth in the second half of the year. In 2009, world copper consumption is forecast to decline by 2 per cent to 17.9 million tonnes as weak world economic growth continues to reduce demand in key copper consuming countries.

OECD copper consumption, which accounts for around half of world copper consumption, is forecast to contract by around 6 per cent to 8.3 million tonnes in 2009. Declining copper consumption in most developed economies is expected to contribute to this fall with the largest declines forecast in the United States, Japan and the Republic of Korea.

In 2009, the United States is forecast to have the largest decline in copper consumption in the OECD, with consumption forecast to fall around 7 per cent. Lower US consumption reflects an assumed contraction in economic growth and a significant decline in construction activity. The construction sector accounts for around half of US copper consumption, thus a fall in the demand for new construction will have a significant impact on copper demand. In December 2008, building permits and housing starts – two leading indicators of residential construction activity – recorded historical lows. Given this, the US residential construction market is likely to remain weak for most of 2009, placing downward pressure on copper consumption. The timing of a recovery in the US housing market is a key risk to the current outlook, with a prolonged downturn expected to place significant downward pressure on copper consumption.

In China, copper consumption is expected to increase by around 4 per cent in 2009, as investment in fixed assets continues to grow. Growth in China’s copper consumption is expected to be lower in the short term as economic contractions in China’s major export markets will reduce the demand for copper intensive goods such as electric motors and consumer durables. Nevertheless, domestic urbanisation and accompanying expansions to electrical transmission and distribution networks, supported by China’s US$586 billion economic stimulus package, is forecast to sustain growth in Chinese copper consumption.

…and begin to recover in 2010

Global growth in copper consumption is expected to gradually increase over the outlook period as world economic growth begins to recover toward the end of 2009 and early 2010. Between 2010 and 2014 world consumption of refined copper is projected to increase by around 4 per cent a year to nearly 22 million tonnes in 2014. Growth in copper consumption over the outlook period is projected to mainly come from China and other developing nations, with only small projected increases in OECD consumption.

China has undergone an impressive process of industrialisation and urbanisation in recent years. This has culminated in more than half a billion people now living in China’s cities. Over the next five years, the transfer of labour from rural areas to cities is expected to continue, expanding demand for new houses and urban infrastructure such as power grids. It is estimated around half of China’s copper consumption is used in the power industry, hence increased construction activity and expansions to generating capacity are expected to support China’s copper consumption over the outlook period.

Economic growth in China’s key export markets is also assumed to support copper consumption as external demand for copper intensive goods increases over the outlook period. In addition, strong assumed economic growth is likely to increase consumer incomes, raising the proportion of household income which is spent on copper intensive goods and services such as consumer durables and transport. In other developing nations such as India and the Russian Federation, copper consumption is also expected to increase over the medium term.

In the European Union and other developed economies, consumption of refined copper is projected to remain relatively steady. Declining copper consumption has been a trend in some developed economies in recent years as manufacturing of copper intensive goods has moved to lower cost countries. This trend is expected to continue over the medium term, limiting growth in OECD copper consumption, which is forecast to average around 0.3 per cent a year over the outlook period.

Over the medium term, economic growth and increases in construction activity in the United States is expected to return to long-term averages supporting increased copper consumption. US copper consumption has declined in recent years as a result of weakness in the US construction industry and manufacturing activity. Government policies such as the recently announced US$787 billion economic stimulus package are expected to provide support for copper consumption in the short term.

Mine production will continue to increase despite cuts in 2009

In 2008, mine production remained flat at around 15.6 million tonnes. Despite large additions to capacity, growth in mine production was constrained by significant supply disruptions caused by equipment failure and low ore grades. Falling copper prices also constrained growth with significant cuts to mine production occurring towards the end of 2008.

Mine production is forecast to increase by 3 per cent to 16 million tonnes in 2009. New projects which will support increased mine production include Equinox Minerals’ Lumwana (170 000 tonnes) in Zambia, Oz Minerals’ Prominent Hill (120 000 tonnes) in Australia and Freeport’s Tenke Fungurume (110 000 tonnes) and KOV restart (250 000 tonnes) in the Democratic Republic of Congo. However, mine production will be lower than previously forecast as over 1.1 million tonnes of planned mine production (6 per cent of global mine capacity) is estimated to have been cut. The largest cuts to mine production have occurred in the United States, Mexico, Chile and Africa where a combination of mine closures and technical difficulties have reduced planned production.

Growth in global mine production over the remainder of the outlook period will depend on the timing of a recovery in prices. Assuming prices begin to gradually recover in 2010, global mine production is likely to follow with a moderate increase in 2010 and more substantial growth in 2011. World copper mine production is projected to increase on average by 4 per cent a year over the medium term to 19.3 million tonnes in 2014. This increase is largely expected to come from new mines in Africa, Asia and Chile. In Asia, Ivanhoe Mines and Rio Tinto’s Oyu Tologi project (440 000 tonnes) in Mongolia are scheduled to enter production in 2012 while Antofagasta’s Esperenza project (195 000 tonnes) and Xstrata’s Tampakan project (200 000 tonnes) in the Philippines are expected to begin in 2013.

Growth in refined copper production to remain constrained in the short term…

In 2008, world refined production increased by around 1 per cent to 18.2 million tonnes as cuts to mine production reduced the availability of concentrate feed and lower prices in the second half of the year reduced secondary production (from scrap metal) of refined copper. In 2009, cuts to mine production and low prices are expected to result in refined copper production remaining flat despite increased capacity in China, Chile and Africa. Capacity in Chile and Africa is expected to increase with the commissioning of various SX-EW projects including Andina (120 000 tonnes) in Chile and Tenke Fungurume (110 000 tonnes) and KOV restart (250 000 tonnes) in the Democratic Republic of Congo.

…but to increase over the medium term

World refined copper production is projected to increase on average by 3 per cent a year to 21.7 million tonnes over the remainder of the outlook period. New SX-EW capacity scheduled to be completed in Chile and Africa is expected to account for a large proportion of this growth. Nevertheless, China is expected to remain the largest producer of refined copper as investment in smelting capacity continues to increase.

Constraints to mine production combined with large increases in global refining capacity over the past two years has led to competition between smelters for limited copper concentrate feed. This has resulted in the price miners pay smelters for refining copper, known as treatment and refining charges, to fall as smelters compete for the limited feedstock. In 2008, low treatment and refining charges combined with sharply lower sulphur prices (produced as a by-product in the smelting process) placed considerable pressure on the profitability of many refineries. In response to this, miners settled 2009 benchmark treatment and refining charges 67 per cent higher than 2008 charges. Despite this increase, it is likely downward pressure will remain on treatment and refining charges over the coming years as considerable cuts to planned production leave the concentrate market undersupplied. If low treatment and refining charges persist, investment in new smelting capacity may be limited over the outlook period. Growth in China’s refining capacity may be particularly impacted by low treatment and refining charges as most smelters in China are not vertically integrated and rely on third parties for concentrate supply.

Australian export earnings to decline in the short term…

Australian copper mine production in 2008-09 is forecast to increase by 7 per cent to
922 000 tonnes largely attributable to increased copper production at Oz Minerals’ Golden Grove and the commissioning of their Prominent Hill project (120 000 tonnes). Mine closures as a result of falling copper prices and difficulties in securing finance has resulted in lower production in 2008-09 than previously forecast. Closures to copper mines include Compass Resources’ Browns Oxide (10 000 tonnes), Barminco’s Eloise (16 000 tonnes) and Matrix Metals’ Leichardt (9000 tonnes).

Increased production at the Townsville Copper Refinery combined with higher production at BHP Billiton’s Olympic Dam is forecast to increase Australia’s refined copper production by 17 per cent to 521 000 tonnes in 2008-09. Offsetting some of this growth is the closure of Browns Oxide and Leichardt SX-EW operations which removed around 20 000 tonnes of refining capacity.

In 2008-09, the metal content of copper exports is expected to increase by around
16 per cent as the export volumes for both ores and concentrates and refined copper are forecast to increase. Higher export volumes are forecast to partially offset a significant decline in export prices resulting in copper earnings declining by 17 per cent to $5.6 billion in 2008-09.

…before recovering over the medium term

Australian mine production is forecast to increase significantly in 2009-10 to over
1 million tonnes as Prominent Hill approaches capacity and Newcrest’s Ridgeway Deeps development (22 000 tonnes) and Newmont and Anglo Gold Ashanti’s Boddington development (30 000 tonnes) are commissioned. In line with higher production, exports of ores and concentrates are forecast to increase by 11 per cent. However, exports of refined copper are expected to decline by 7 per cent reflecting the closure of SX-EW capacity in the previous financial year. In all, lower average copper prices are forecast to offset higher export volumes with the value of export earnings declining by 22 per cent to $4.4 billion in 2009-10.

Over the remainder of the outlook period Australian mine production is projected to grow at an annual average of 5 per cent a year to 1.2 million tonnes in 2014. Projects expected to enter production over the outlook period include Golden Cross Resources’ Copper Hill project (25 000 tonnes), Universal Resources’ Roseby project (26 000 tonnes), Exco Resources’ Cloncurry development (20 000 tonnes) Havilah Resources’ Kalkaroo (19 000 tonnes) and Mutooroo (10 000 tonnes) projects and Copper Strike’s Einasleigh project (8000 tonnes). Additional capacity is also expected to come from the reopening of some mines closed during 2008 as a result of significantly lower copper prices and financing difficulties.

Australian exports of copper ores and concentrates and refined copper are projected to increase in line with higher mine production. Exports of copper ores and concentrates are expected to have the largest growth because no significant planned additions to Australia’s refining capacity are expected over the medium term. Reflecting increased export volumes and higher average export prices, the value of Australia’s copper exports is projected to peak in 2011-12 at $6.5 billion (in 2008-09 dollars). Falling export prices towards the end of the outlook period is forecast to result in copper export earnings declining to $5.9 billion (in 2008-09 dollars) in 2013-14.

Copper outlook

unit

2007

2008

2009

2010

2011

2012

2013

2014

World

Production

– mine

15 561

15 614

16 024

16 455

17 105

17 705

18 512

19 337

– refined

17 972

18 178

18 235

18 610

19 180

19 991

20 904

21 733

Consumption

18 026

18 124

17 850

18 374

19 157

19 941

20 754

21 615

Closing stocks

668

721

1 106

1 343

1 366

1 417

1 567

1 685

– weeks consumption

wks

1.9

2.1

3.2

3.8

3.7

3.9

4.1

Price lme

– nominal

US$/t

7 133

6 976

3 330

3 750

5 320

5 625

4 963

4 888

USc/lb

323.5

316.4

151.0

170.1

241.3

255.1

225.1

221.7

– real a

US$/t

7 447

6 993

3 330

3 686

5 125

5 302

4 577

4 411

USc/lb

337.8

317.2

151.0

167.2

232.5

240.5

207.6

200.1

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

Australia

Mine output

859

863

922

1 016

1 038

1 067

1 117

1 200

Refined output

435

444

521

501

506

521

522

527

Exports

– ores and conc. b

1 493

1 694

1 728

1 909

1 971

2 020

2 202

2 490

– refined

290

296

366

341

346

361

362

367

Nominal value

A$m

6 526

6 730

5 569

4 377

5 229

6 955

6 919

6 684

Real value c

A$m

6 884

6 866

5 569

4 294

5 005

6 494

6 303

5 940

a In 2009 US dollars. b Quantities refer to gross weight of all ores and concentrates. c In 2008-09Australian dollars. f ABAREforecast. z ABARE projection.
Sources: Australian Bureau of Statistics; International Copper Study Group; World Bureau of Metal Statistics; ABARE.