Copper maintains global support

Major supply issues have combined with robust Chinese demand to continue to support global copper prices.

Copper is a bellwether commodity and despite all of the negativity surrounding Europe, the United States and China, the price has demonstrated particular resilience over recent times.

On the demand side Chinese copper imports hit a record during December, whilst on the supply side there are major near-term and longer-term concerns relating to industrial disputes and declining head grades.

These factors have led to a 17 per cent increase in the price of copper over the past month.

Overall head grades at the world’s biggest copper mines have fallen by around a third over the past decade.

This means that companies have to move a third more dirt in order to produce the same amount of copper, but at a significantly higher cost.

We’ve previously used Rio Tinto as the perfect case study to examine of the problems afflicting the world’s major copper producers.

The company’s just-released December Quarter 2011 production report further reinforces our position.

Rio’s production report showed that Q4 2011 attributable mined production slumped by 26 per cent year-on-year, whilst full-year production of 519,700 tonnes was down 23 per cent on 2010.

 

Whilst demand in the emerging world continues to climb, the supply-side is being threatened by the terminal decline in grades at the world’s biggest copper mines.

Virtually without exception, all of the world’s biggest copper operations in North America, South America and Asia, are faced with steadily declining production as operations become more mature.

To remedy the situation, the world’s biggest miners now have to search in riskier global destinations, typically for deposits that are deeper, lower-grade and more costly to develop.

This is why I am hugely positive about the outlook for copper.

Companies will demand higher prices in order to push the button on the huge expensive projects needed to meet future demand.

On the demand side, China’s refined copper production rose by 14.2 per cent during 2011, with December monthly output up 8 per cent compared to the same period a year earlier.

Inbound shipments of the refined metal, copper alloy and products totaled 508,942 metric tons, gaining for the seventh straight month, according to data from the General Administration of Customs, the highest level ever.

China’s copper consumption growth will slow to 6.4 per cent during 2012, or 7.85 million tons, according to Beijing Antaike Information Development Co.

This compares with 8.5per cent growth during 2011 to 7.38 million tons, and 11.5 per cent to 6.8 million tons during 2010.

Interestingly, copper inventories in London Metal Exchange warehouses have dropped to a 13-month low, and more declines are likely, due to a pick-up in US demand and concerns about a market deficit.

Copper stocks have slid by around a quarter since October as weak prices have spurred restocking in China, culminating in record copper imports into the country during December.

It’s likely that the 25 per cent drop in LME copper prices during Q4 2011 triggered Chinese restocking, which in turn has resulted in the 17 per cent price recover since mid-December.

China accounts for about 40 per cent of global copper consumption. But Chinese buying is now likely to take a back seat ahead of the Lunar New Year.

Balancing the expected slowdown in copper buying from China are some emerging bright spots for demand, with recent US data from the labour market to manufacturing showing signs of a pick-up in economic activity.

Copper stocks may also be declining due to an anticipated market deficit this year.

The global market for refined copper is seen in a 250,000 tonne production deficit during 2012, before easing to become nearly balanced in 2013, according to a report from International Copper Study Group in October last year.

So keep an eye on copper during 2012 – Chinese buying and supply-side issues are likely to keep prices bubbling.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report