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Commodity analysts’ forecasts are sometimes wrong about copper supply, predicting a market glut of the ubiquitous steel used in everything from pipes and household wiring to electric vehicle components.
Elusive surplus
In 2022, copper mining production will increase by 4% to 21. 9 million tonnes and fine copper production by 1% to 24. 6 million tonnes. Global intake of fine copper amounted to 24. 8 million tonnes.
When the International Copper Study Group (ICSG) met last October, it expected a market surplus of 155,000 tonnes in 2023. In May, the organization estimated a deficit of 114,000 tonnes.
The first thing one notices about this statistic is its relatively small size. In a total copper market of 22 million tonnes, we had a negligible deficit of 114,000 tonnes, significantly less than 1% of the total market. Can we claim to be accurate enough? Do we expect the amount of surplus or deficit to be equivalent to less than one ton in a hundred? What is a rounding error? This is very unlikely.
But, for the sake of argument, let’s say that the ICSG’s deficit forecast for 2023 is correct. What explains the goal?
Andy Home, a Reuters columnist on metals, points out two things that exist in the current copper discourse. The first is that the use of copper in China is developing faster than expected. Second, the mining source has still met expectations.
The ICSG reports that China’s obvious use of subtle copper is expected to increase by up to 1. 2% this year and 2. 4% in 2024. The expansion of use in the rest of the world is expected to outpace the speed from 0. 4% last year to 1. 6% this year, exceeding pre-covid levels, according to the ICSG.
The organization says that despite challenging macroeconomic conditions, “manufacturing activity is expected to continue to increase in copper’s primary end-use sectors. “
The most attractive figures fear the mining supply. When the ICSG met last October, it expected global mining production to grow by 3. 9% in 2022 and 5. 3% this year. At the time of Home’s publication in May, the organization had the idea of expanding mining production last year. 3%, and lowered its forecast to 3% this year.
Remember, new copper supply is concentrated in just five mines — Chile’s Escondida, Spence and Quebrada Blanca, Cobre Panama and the Kamoa-Kakula project in the DRC.
Home references four of them, all except the biggest copper mine in the world, Escondida @ 1 million tonnes per year, as supply additions that have been ramping up simultaneously.
However, the expected wave of new materials is offset by effects on existing operations.
The ICSG cites as reason for its lowered mine growth expectations “operational and geotechnical issues, equipment failure, adverse weather, landslides, revised company guidance in a few countries and community actions in Peru”.The Group and every other copper analyst include a supply disruption offset in their mine supply forecasts but the past six months have been particularly problematic even by copper’s historical standards of mine under-performance.The net effect is a smoothing of the supply wave over the forecast period with mine growth expected to slow to 2.5% in 2024 as current ramp-ups are completed and any new additions arrive late in the year, according to the ICSG.
Home’s research also sparks a war of words in the existing copper discourse between bulls and bears. The bulls represented through Goldman Sachs have “no new wave of sources this year” and warn of a “shortages” as stock stocks fall. to critical degrees.
The bank is targeting a 25% increase in the value of copper for this year, with a 12-month forecast (starting in May) of $11,000 per tonne.
On the bearish side is Citi, as the investment bank states: “In our view, a shortage in 2023 is incredibly unlikely. ” Citing weak global demand, high inventories of finished goods and supply, Citi reduced its value from May to July. It is expected that between 8,000 and 8,000 dollars per ton.
Kitco’s 6-month chart shows that the spot price as traded is between a low of just under $2. 50 per pound ($5,511 per tonne) in early October and close to $4/pound ($8,818/t) at the end of July.
Prices rose on Monday on growing optimism that the Federal Reserve will end its rate hikes, with copper futures hitting $3. 81 a pound on the New York Comex in December.
Casting Costs
While Citibank achieved a more accurate 2023 copper price forecast than Goldman Sachs, by one important metric its supply optimism for 2024 is wrongly placed.
Every November, the world’s copper miners and Chinese refiners meet to negotiate their copper contracts and set processing and refining rates (TC/RC) for the following year.
Miners pay smelters a fee to process copper concentrate into refined metal, to offset the cost of the ore. TC/RCs fall when tight concentrate supplies squeeze smelters’ profit margins.
“The smelting costs to convert mined concentrate into stainless steel are a reflection of what happens at the basic level of the copper origin chain, increasing in times of surplus and decreasing in times of deficit. Reuters
If we are heading for a surplus in 2024, as Citibank predicts, why are smelting fees falling?
Last week, Bloomberg reported that Antofagasta, a Chilean mining company, and Jinchuan Group, a Chinese smelter, agreed to set processing and refining fees for 2024 at 9% less than this year, “as production of mined ore declines and refining capacity increases. “
The payment of $80 per tonne and 8 cents per pound compares with a six-year high of $88 per tonne and 8. 8 cents per pound in 2023, and is the first pay cut in three years.
Readers of last week’s AOTH article will recall that to ensure self-sufficiency, China is/ has expanded its network of copper smelters, meaning it will start to import much more copper ore for processing domestically.
“Like all countries, China sees a strategic need for copper — especially with the expansion of green energy programs — and China, like other countries, needs to ensure self-sufficiency,” said Craig Lang, senior analyst at researcher CRU Group.
“China will account for about 45% of global copper production this year, according to the SRB. Bloomberg
China’s new copper smelting capacity is expected to make China a net exporter of copper until 2025 or 2026. With so many foundries requiring copperArray, the market is narrowing.
The deficit threatens
Like the entire copper market. In February, CNBC reported that “a copper shortfall is poised to flood global markets in 2023, driven by increasingly complicated South American origin flows and increasing pressures. “
Wood Mackenzie forecasts large copper deficits through 2030, largely attributed to unrest in Peru and increased demand for copper in the energy transition sector.
The South American country, which accounts for 10% of the world’s copper supply, has been plagued by protests since the ouster of its former president, Pedro Castillo, last December.
In January, Glencore suspended operations at its Antapaccay copper mine after protesters looted and burned its facilities.
A strike is recently underway at the Las Bambas mine, owned by China’s MMG Ltd. , and the union will declare an indefinite strike from 28 November if the company does not meet its demands.
Neighboring Chile, the largest manufacturer of the red metal, which represents 27% of the supply, registered a year-on-year drop of 7% last November.
“Overall, Chile will most likely produce less copper between 2023 and 2025,” Goldman Sachs wrote in a Jan. 16 note.
The Cobre Panama mine is a blocked source and owner First Quantum Minerals warned on Monday that it would have to suspend operations if the current blockade of the port continues.
Against the backdrop of the controversy, Mining. com noted that the Vancouver-based company and the Panamanian government reached a multimillion-dollar settlement last month that ended months of negotiations between the two sides. The upcoming law sparked a series of violent protests that have just ended in paralyzed Panama City. Protesters say the new contract was rushed through with little transparency and accuse the government of corruption. Residents are also concerned about the mine’s effects on drinking water and the Panama Canal.
When it comes to the transition to green energy, analysts at Wood Mackenzie estimate a shortfall of 6 million tonnes over the next decade, meaning that 6 Escondidas is expected to come online in that era; this would possibly not happen NOT 100%, not even close.
The challenge is that there aren’t enough new mines, let alone giant ones. Bloomberg NEF estimates that demand for fine copper will increase by 53% through 2040, but supply will only increase by 16%.
A report by consultancy McKinsey found that electrification is expected to increase annual copper demand to 36. 6 million tonnes through 2031, and source projections provide a pathway to 30. 1 Mt, leaving 6. 5 Mt of capacity undiscovered.
Jérôme Leroy, vice president of cable provider Nexans’ Canadian business unit, spoke about forecasts that production capacity will reach 27 million tonnes per year by the end of this decade, while demand could reach only 35 million tonnes. that a deficit could materialize as early as next year.
Why can’t more copper be mined? The International Copper Study Group says that since 1960 there has been an average of 38 years of underground reserves. In fact, despite the growing demand for copper, reserves have been accumulating (as copper costs rise, costs are not profitable). Ore becomes profitable), and there is more copper known than at any other time in history, the organization says.
In addition, the U. S. Geological Survey estimates that although the world has produced 700 million tons of copper, there are still 2. 1 billion tons of undiscovered copper deposits to be exploited.
Two reasons we are mining more copper are costs (incentive costs in the copper industry are estimated at 11,000 tonnes) and regulatory delays.
According to a recent blog post by copper cable manufacturer Kris-Tech, determining whether a company has enough copper ore for the investment to be successful can take two to eight years, and another four to 12 years before it can begin operations. In North America, it can take up to 20 years for a mine to go from discovery to production.
“The number one new copper mines between 2019 and 2022 had an average time from discovery to advertising production of 23 years. “
“New copper projects that are expected to increase advertising production in 2023 include Quebrada Blanca Phase 2 in Chile, Kisanfu in the Democratic Republic of Congo, Kalongwe in the Democratic Republic of Congo, Tshukudu in Botswana, Anthill in Australia, Serrote in Brazil and Udokan in Russia, potentially adding approximately 550,000 metric tons. However, most of the long-term expansion in copper supply will come from planned expansions at existing mines, rather than from the progression of new operations.
Meanwhile, current mines face dwindling reserves of unabashedly available copper ore, which miners have to dig deeper; The increase in searches notoriously sets prices.
I understand that exploration is not easy, especially, in my opinion, considering that most of the world’s giant high-grade deposits have already been discovered. But why can’t copper-making giants simply dip into their existing reserves to meet developing demand?
The truth is, they have been. Instead of sending exploration teams around the world turning over rocks to find the next gigantic copper deposit, the main way copper companies have added reserves is by lowering their cut-off grades.
The way to do this is simple. A mining plan is based on the “cut-off law,” which is the minimum law required to make it economical to extract a unit of rock at a certain value. Any ore below this grade remains in the soil. When steel prices rise, the mining company earns more per ton, as long as it allows it to “lower the cut-off grade” and still make a profit. It is necessarily a question of transforming what in the past was barren rock with the old value into an exploitable mineral with the new value.
By 2015, the industry’s head grade was already 30% lower than in 2001, and the capital cost per tonne of annual production had surged four-fold during that time — both classic signs of depletion.
According to Goehring
The importance of making new discoveries to identify a sustainable copper chain is obvious.
Over the past decade, the addition of new copper reserves has slowed significantly, and tonnage from new discoveries has fallen 80% since 2010.
Several large copper mines have mined out all the ore in open pits and are heading underground for the higher-grade, but more expensive to extract material. One example is Oyu Tolgoi in Mongolia, which began underground operations in May.
An article in the Japan Times indicates that as demand for copper increases, the source will most likely come from mines like this in the arid steppe: expensive, technically complex, classic copper jurisdictions outside the gates and operating under the watchful eye of governments. jealously guarding their herbal resources.
“There is a huge crisis,” says Doug Kirwin, one of the first geologists who painted the deposit that Oyu Tolgoi, or Turquoise Hill, named after rocks in the region, was stained with oxidized copper.
“There is no way we can get the amount of copper needed in the next 10 years to drive the energy transition and achieve zero carbon emissions. That’s not going to happen,” adds Kirwin, now an independent consulting geologist. “There are enough copper deposits in the process of being discovered or developed. “
The article notes that the looming copper shortage has fueled copper mergers and acquisitions, such as Glencore’s hostile takeover of Teck Resources, Newmont’s bid for Australia’s Newcrest, and BHP’s acquisition of copper manufacturer Oz Minerals. .
The most recent copper deal saw China’s MMG agreeing to pay $1.9 billion for Cuprous Capital, a private company that owns the Khoemacau operation in Botswana.
Mining M&A in 2023
However, Japan Times concludes that none of these deals, which simply transfer copper reserves from one company to another, will alter the global copper balance, given that “building new mines, as opposed to buying them, is still too much of a headache,” and that exploration spending remains far short of what is required.
According to Goldman Sachs, regulatory approval for new copper mines has fallen to its lowest point in a decade, a sign of concern for things to come, as regulatory approval to build a mine can take up to 20 years.
“Mines are getting older, mines are getting deeper, and mines are getting lower grade,” the news site quotes David Radclyffe, managing director at Global Mining Research. “Then you’ve had the added complications of the need to conform with the shift in terms of environmental requirements. And political risk on top of that.”
“Capital expenditure through mining is expected to be minimized by 11% in 2023, and exploration spending is expected to be minimized by 10% to 20%. “Kevin Murphy, senior metals and mining analyst at S.
Asian samples
Another obstacle to addressing the copper deficit is the fact that four of the five new large mines have offtake agreements already in place.
At Cobre Panana, nearly half of the 300,000 tonnes per year (tpy) production goes to Korea. Under a 15-year offtake agreement, Canadian miner First Quantum Minerals will ship 122,000 tpy of copper concentrates from Cobre Panama to South Korean copper smelter LS Nikko.
The largest, by far, of the 5 mines expected to deliver 80% of new copper production is Robert Friedlands Kamoa-Kakula copper project in the Democratic Republic of Congo (DRC). The project is a joint venture between Ivanhoe Mines (39.6%), Zijin Mining Group (39.6%), Crystal River Global Limited (0.8%) and the DRC government. Kakula reached commercial production on May 25, 2021, and while output is set for 200,000 tpy in Phase 1, a second phase would add 200,000 tpy and peak production would exceed 800,000 tpy.
(Remember that the forecast is that we will need one million tons of new copper production PER YEAR for 6 years. Kamoa-Kakuls’ long-term production of 800,000 tpa covers nearly one year out of 6. Where will the other five years of new production be?million TPAs come from?)
Ivanhoe has signed two sequestration agreements, one with a subsidiary of its parent company, China’s Zijin Mining; the other with Chinese commodity trader CITIC Metal, for each to sell 50% of copper production from Kakula, the first of the two mines involved in the joint venture. In other words, one hundred percent of the production of Phase 1 of Kamoa-Kakula is destined for China. .
That leaves three mines in Chile — Escondida, Spence and Quebrada Blanca’s “QB2” expansion. In 2016 BHP, the majority owner of Chile’s Escondida, the largest copper mine in the world, committed to spend just under $200 million to expand its Los Colorados concentrator. The expansion would help offset declining ore grades and add incremental copper production to reach an average 1.2 million tonnes a year over the next decade. BHP owns a 57.5% share in Escondida, Rio Tinto owns 30%, and the remaining 12.5% is owned by JECO Corp and JECO2 Ltd.
JECO is a Japanese partnership between Mitsubishi Nippon Mining
BHP said that once the Spence mine expansion reaches full production, it will produce 300,000 tpa until at least 2026. Spence’s ownership is shared 50/50 between BHP and Santiago-based Minera Spence SA.
Teck Resources’ Quebrada Blanca Phase 2 assignment is expected to produce 316,000 t/yr of copper equivalent over the first five years of its 28-year mine life. In 2019, the Canadian company closed a $1. 2 billion transaction in which Tokyo-based Sumitomo Metal, Mining and Sumitomo Corp, with a contribution of $800 million and $400 million, will obtain a 30% stake in the owner of the assignment Compañía Minera Teck Quebrada Blanca S. A. (“QBSA”). Like Escondida, it’s unclear whether the two Japanese corporations will accept a share of QB2 production or simply split the profits.
Summing up, our analysis shows that in four of the five mines where new copper supply is concentrated, there are offtake agreements either in place or implied, with non-Western buyers. In the case of Kamoa-Kaukula, 100% of initial production will be split between two Chinese companies, one of which owns 39.6% of the joint venture project. Nearly half of Cobre Panama’s annual production goes to a Korean smelter under a 2017 offtake agreement. Escondida and Quebrada Blanca are both partially owned by Japanese companies — one can assume that a corresponding percentage of production will be going there.
Analysts don’t care who owns copper, their only fear is the volume of its global source. Unfortunately, its fate – basically China, South Korea, and Japan – means its source is not global. The fact is that the West, i. e. us, has virtually no procurement agreement in place for 80% of the world’s long-term copper source.
Commodity analysts like to talk about the wave of global supply about to crash onto the copper market, but they don’t seem to realize that 80% of the foreseeable copper supply is coming from just five mines, but four out of five have offtake agreements with non-Western buyers.
This source is blocked. It has been said in the past that we want to locate another 6 million tonnes of cop consistent with production, or 1 million tonnes consistent with the year of new cop consistent with production, if we are to reduce the shortfall: production equivalent to one Escondida mine each. year – however, only one of the five mines, Kamoa, has the capacity to produce that amount of copper. But Kamoa’s production is destined for China.
At AOTH we make a clear distinction between global copper supply and the global copper market. Mined copper that is locked up by offtake agreements should not rightly be lumped in with global supply, because it will never reach the United States, Canada or Europe. Instead, this copper will go straight to smelters in China for use in Chinese industry, to South Korean smelters for South Korean industry, and to Japanese smelters for Japanese industry.
We know that Chile, the world’s largest copper producer, has water turmoil and has to desalinate seawater used for copper mining in the arid north of the country. Cochilco, the national copper commission, estimates that the use of desalination in the mining sector will increase to 156% by 2030, and 90% of desalinated seawater will be used for copper processing.
Reuters said severe droughts are drying up rivers and reservoirs for emission-free hydropower generation in several countries.
As global warming makes already scarce water and mineral resources more difficult and expensive to access, the protection of existing mines and the hunt for new deposits will intensify, resulting in potentially lower production, higher operating costs and conflicts between both water and land users.
Now that much of the world is experiencing droughts lately and the effects of warming are becoming more common and more powerful, it seems to me that there is a very genuine threat to steel production in the long run.
“Disruptions at copper mines caused by extreme weather and labour issues, for example, are predicted to worsen, likely affecting a record 1.6 million tonnes of production this year, Goldman Sachs analysts say, a headache for companies hunting for minerals to power the green energy boom as their deposits get depleted.” Reuters
It will be difficult enough to reduce the current production of mined copper of 22 million tonnes, let alone double it. Keep in mind that more than two hundred copper mines are expected to run out of ore by 2035, 80% of new production is in just five mines, and most of this ore is secured in procurement deals with Asian buyers.
Beyond electrification and decarbonization, we will still need enough copper for all its other uses, in construction wiring & plumbing, infrastructure build outs, transmission lines, etc. On top of this there is the surging need for copper in developing countries, whose populations want to “live like an American.”
“The average American will consume 53 times more goods and services than someone from China….With less than 5 percent of world population, the U.S. uses one-third of the world’s paper, a quarter of the world’s oil, 23 percent of the coal, 27 percent of the aluminum, and 19 percent of the copper.” Sept 2012, Sierra Club’s Dave Tilford
Conclusion
Asian countries are switching to ore imports as they expand refinery/ smelting capability. This does not bode well for Western copper supplies. Remember, for the foreseeable future, copper supply is 80% concentrated in just five mines, all of which have major off-take agreements with South Korea, Japan or China. For instance, 100% of the massive Kamoa mine’s off-take will go to China.
The CRU anticipates a 5% growth in copper demand in China this year, while Goldman Sachs Group Inc. has designated copper as one of its top commodity picks for the next year, citing a “robust green demand environment,” particularly in China.
According to herbal resources investment firm Goehring
“Driven by concerns of an impending global recession, copper sentiment remained bearish during the second quarter. On the other hand, copper’s short-term fundamentals became increasingly bullish. Mine supply disappointed again in the first four months of 2023, according to the World Bureau of Metal Statistics (WBMS).
Chilean production remains particularly problematic. During the first 4 months of the year, Chile’s mining source decreased by almost 2% compared to last year. Codelco warned that production could fall to its lowest point in 25 years. In June, André Sougarret resigned as leader of Codelco. CEO after only one year in the position. Sougarret spoke of the many “complexities” facing Chile’s copper mines.
Chile produces about a quarter of all copper production, and in previous letters we have discussed the disorders afflicting its copper industry; In particular, declining ore grades, water scarcity, labor disruptions, and dubious tax regimes have had a negative effect on production. Unfortunately, we do not foresee any improvement in these disorders in the future. Global source of copper mines contracted by 0. 2% in the first 4 months of 2023 compared to last year, due to disappointments in Chile.
Meanwhile, global copper demand remained robust in both OECD and non-OECD countries. For the first four months of 2023, OECD copper demand increased by a robust 3.7%. Despite countless bearish articles in the financial press, Chinese copper demand continues to surge, with refined demand rising by 8% year-on-year.” An excerpt from its Q2 2023 commentary.
China is already devouring copper and copper ore at a rate, and now it needs even more. I have no doubt that China is intentionally tightening its control over the global copper market, as it has already done in the supply chains of lithium, cobalt, graphite, nickel, rare metals and earths.
“In its critical minerals strategy in December, Canada listed copper as one of the top six critical minerals, along with lithium, graphite, nickel, cobalt and rare earth elements, due to its importance in the clean technology sector.” Financial Post
It turns out that the West once again allowed itself to be deceived.
(By Richard Mills)
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