(MENAFN- Investor Ideas) Commodity analysts’ forecasts are sometimes wrong on copper supply, predicting a market glut for 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 tons and subtle copper production by 1% to 24. 6 million tons. World consumption of fine copper amounted to 24. 8 million tons.
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 tons.
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 say that we are precise 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 highly unlikely.
But, for the sake of argument, let’s say that the ICSG’s deficit forecast for 2023 is correct. What explains the goal?
Reuters metals columnist Andy Home points out two things that exist in the current copper discourse. The first is that copper consumption in China is growing 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 rise to 1. 2% this year and 2. 4% in 2024. The expansion of use in the rest of the world is expected to exceed last year’s 0. 4% speed to 1. 6% this year, surpassing pre-covid levels, according to the ICSG.
The organization says that despite challenging macroeconomic conditions, “manufacturing activity is expected to continue to increase in most key copper end-use sectors. “
The most attractive figures fear the mining supply. When the ICSG met last October, it expected global mining production to grow 3. 9% in 2022 and 5. 3% this year. At the time of the Home article in May, the organization had the idea of expanding mining production last year. year by 3%, and lowered its forecast to 3% this year.
Recall that the new copper is concentrated in just five mines: Escondida, Spence and Quebrada Blanca in Chile, Cobre Panama and the Kamoa-Kakula assignment in the Democratic Republic of Congo.
Casa refers to four of them, all of them the largest in the world, including mine, Escondida, at 1 million tons a year, as additions from sources that have accelerated simultaneously.
However, the expected wave of new materials is offset by effects on existing operations.
The ICSG cites as an explanation for the decrease in expectations for mining expansion “operational and geotechnical problems, equipment failures, adverse weather conditions, landslides, revised corporate rules in some countries, and network movements in Peru. “Analysts come with an interruption at the source. However, the past six months have been particularly problematic, even across old criteria of underperformance of copper mines. The net effect is a smoothing of the source wave over the forecast period, with mine expansion expected to slow to 2. 5% in 2024, when existing increases end and new additions are overdue 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 is trading between a low of just under $2. 50 per pound ($5,511 per tonne) in early October and close to $4 per pound ($8,818 per tonne) at the end of July.
Source: Kitco
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 Comex in New York in December.
Source: London Metal Exchange
Casting Costs
Although Citibank made a more accurate 2023 copper price prediction than Goldman Sachs, its initial optimism for 2024 is misplaced according to a major indicator.
Every November, global copper miners and Chinese refiners meet to negotiate their copper contracts and set processing and refining fees (TC/RC) for the following year.
Miners pay fees to smelters to transform copper concentrate into fine metal, to offset the cost of the ore. CT/CR falls when limited concentrate reserves have smelter profit margins.
“The smelting costs to convert mined concentrate into refined steel offer a reflection of what happens at the basic level of the copper origin chain, rising in times of surplus and decreasing in times of deficit. “
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, had agreed to set processing and refining fees for 2024 at 9% less than this year, “as mined ore production 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 in order to achieve self-sufficiency, China has expanded its copper smelting network, meaning it will start loading much more copper ore to process 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 research organization CRU.
“China will account for about 45% of global copper production this year, according to the CRU. “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 deficit is expected to flood global markets in 2023, driven by increasingly complicated South American origin flows and increased 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 set fire to its facilities.
A strike has been underway lately at the Las Bambas mine, owned by China’s MMG Ltd. , and the union will reportedly call an indefinite strike from 28 November if the company does not meet its demands.
Neighboring Chile, the largest producer of the red metal, which accounts for 27% of supply, posted a 7% year-on-year drop last November.
“Overall, Chile will most likely produce less copper between 2023 and 2025,” Goldman Sachs wrote in a Jan. 16 note.
The Cobre Panamá mine is a blocked source and owner First Quantum Minerals warned on Monday that it would have to suspend operations if the current port blockade continues.
Amid the controversy, Mining 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 nearly 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; 6 Escondidas are expected to become operational in this era; this will only happen NOT 100%, not even close.
The challenge is that there aren’t enough new mines, let alone giant mines. Bloomberg NEF estimates that demand for fine copper will increase by 53% through 2040, but supply will only increase by 16%.
A report by consulting firm McKinsey found that electrification is expected to boost annual copper demand by up to 36. 6 million tonnes through 2031, with source projections providing a path to 30, leaving 6. 5 million tonnes of capacity per year. discover.
Jérôme Leroy, vice president of the Canadian business unit of cable provider Nexans, analyzed forecasts that production capacity will reach 27 million tons per year until the end of this decade, while demand could only reach 35 million tons per year. tons. He warned 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 lead time of 23 years from discovery to advertising production. “
“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 tonnes of copper production in 2023. 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. “S
Meanwhile, current mines face dwindling reserves of readily available copper ore, which miners have to dig deeper; The increase in searches noticeably fixes prices.
I understand that exploration is not easy, especially, in my opinion, given that most of the world’s giant, high-quality deposits have already been discovered. But why can’t primary copper manufacturers simply tap into their existing reserves to meet developing demand?
The fact is, they were. Instead of sending exploration teams around the world to search for rocks in search of the next gigantic copper deposit, the main way copper companies have to increase their reserves is to lower their cut-off grades.
The way to do this is simple. A mine plan is based on the “cut-off grade,” which is the minimum grade necessary to make extracting a rock unit economical at a given price. Any ore below this grade remains in the soil. When steel costs rise, the mining corporation earns more per ton, consistent with allowing it to “reduce the cut-off grade” while still making a profit. Basically, it is a matter of converting what in the past was waste rock at old costs into mineable ore at new cost prices.
By 2015, the industry’s top quality was already 30% lower than in 2001, and the rate of investment per tonne of annual production had quadrupled in that same period – two classic symptoms of burnout.
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.
Average Copper Reserve Grade
Several giant copper mines have mined all the ore in the open pit and are moving underground to extract higher-grade ore, even more expensive to mine. One example is Oyu Tolgoi in Mongolia, which began underground operations in May.
An article in the Japan Times states that “as demand for copper increases, the source will most likely come from mines like this located in the arid steppe: expensive, technically complex, located outside the jurisdictions, classic copper industries, and exploited under the supervision of governments that jealously guard their herbal resources.
“There’s a huge crisis,” says Doug Kirwin, one of the first geologists to paint the Oyu Tolgoi deposit, or Turquoise Hill, named after the area’s rocks stained with oxidized copper.
“There’s no way we’re going to be able to get the amount of copper 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. “Sufficient deposits of developed or developed copper are being found. “
The article notes that the looming copper shortage has mergers and acquisitions (M
In the latest copper deal, China’s MMG agreed to pay $1. 9 billion to Cuprous Capital, a company that owns the Khoemacau operation in Botswana.
Mining M&A in 2023
However, the Japan Times concludes that none of those deals, which only involve moving copper reserves from one company to another, will replace the global copper balance, given that “building new mines, rather than buying them, remains a major headache. “”” and that exploration spending is still far below what is needed.
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 aging, getting deeper and shrinking,” David Radclyffe, managing director of Global Mining Research, quoted the news site as saying. “Then there are the additional headaches of having to comply with changing environmental requirements. It threatens most of them. “
“Capital spending 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 impediment to reducing the copper deficit is the fact that 4 of the five new mines have already signed extraction agreements.
At Cobre Panana, almost part of the 300,000 tonnes per annum (tpa) of production is destined for Korea. Under a 15-year purchase agreement, Canadian mining company First Quantum Minerals will ship 122,000 tpa of copper with Cobre Panama concentrates to the South. Policeman LS Nikko from Korea matches the foundry.
By far the largest of the five mines expected to generate 80% of new copper production is the Robert Friedlands Kamoa-Kakula copper allocation in the Democratic Republic of Congo (DRC). The allocation is a joint venture between Ivanhoe Mines (39. 6%), Zijin Mining Group (39. 6%), Crystal River Global Limited (0. 8%) and the Government of the Democratic Republic of the Congo. Kakula reached advertising production on May 25, 2021 and production is set at 200,000 t/year in Phase 1, a second phase would be increased by 200,000 t/year and maximum production would exceed 800,000 t/year.
(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 purchase agreements, one with a subsidiary of its partner, the Chinese company 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, 100 percent of Kamoa-Kakula’s production phase 1 is destined for China.
This leaves three mines in Chile: Escondida, Spence and the Quebrada Blanca “QB2” expansion. In 2016, BHP, the majority owner of Chile’s Escondida, the world’s largest miner, pledged to spend just under $200 million to expand its Los Colorados concentrator. The expansion would offset declining ore grades and increased production to an average of 1. 2 million tonnes annually over the next decade. BHP owns 57. 5% of Escondida’s shares, Rio Tinto 30% and the remaining 12. 5% is held through JECO Corp and JECO2 Ltd.
JECO is a Japanese joint venture 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 keep a percentage of QB2’s production or if they’ll just be limited to a percentage of the profits.
In summary, our research shows that in 4 of the five mines where the new copper source is concentrated, there are purchase agreements, either formal or implicit, with non-Western buyers. In the case of Kamoa-Kaukula, one hundred percent of the initial production will be split between two Chinese corporations, one of which owns 39. 6% of the allocation in a joint venture. Nearly part of Cobre Panama’s annual production is destined for a Korean smelter under a 2017 acquisition agreement. Both Escondida and Quebrada Blanca are partly owned by Japanese corporations; It can be assumed that a corresponding percentage of production will pass there.
World Copper Bulletin 2020
Analysts don’t care who owns the copper, their only fear is the size of its global supply. Unfortunately, its destination – basically China, South Korea and Japan – means its source is not global. The fact is that the West, meaning us, has virtually no offtake agreements in place for 80% of the world’s long-term copper supply.
Commodity analysts like to talk about the global wave of sources that’s about to hit the copper market, but they don’t seem to realize that 80% of the predictable source of copper comes from just five mines, and yet 4 out of five have purchase agreements. -Western buyers.
This source is blocked. It has been said above that we want to locate an additional 6 million tonnes of copper, or 1 million tonnes of new copper consistent with annual production if we are to reduce the shortfall, the equivalent of the output of one Escondida mine each. every year, but 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 transparent difference between the global source of copper and the global copper market. Mined copper that is locked in by purchase agreements should not be included in the global source, as it will never succeed in the United States, Canada, or Europe. Instead, this copper will go directly 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 through mining will increase. up 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 complicated and costly, the coverage of existing mines and the search for new deposits will intensify, which can lead to decreased production, higher operating costs, and conflicts between 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 excessive weather and hard-working issues, for example, are expected to worsen, most likely affecting record production of 1. 6 million tonnes this year,” Goldman Sachs analysts said, a headache for mineral corporations to force green. energy boom as their reservoirs are 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 continue to desire enough copper for all of its other uses, in wiring and plumbing, infrastructure structures, transmission lines, and more. Added to this is the growing desire for copper in emerging countries, whose populations “live like an American. “
“The average American will consume five times as many goods as a Chinese. . . With less than five percent of the world’s population, the United States consumes one-third of the world’s paper, a quarter of the world’s oil, 23 percent of coal, 27 percent of aluminum, and 19 percent of copper. September 2012, Dave Tilford of the Sierra Club
Conclusion
Asian countries are turning to mineral imports as they expand their refining and smelting capabilities. This does not bode well for Western copper materials. Keep in mind that for the foreseeable future, 80% of the copper source is concentrated in just five mines, all of which have major procurement agreements with South Korea, Japan, or China. For example, 100 percent of the materials from the huge Kamoa mine will go to China.
The CRU forecasts a 5% expansion in copper demand in China this year, while Goldman Sachs Group Inc. named copper one of its most sensible commodity picks for next year, positing “strong green demand for the environment”, specifically in China. .
According to herb investment company Goehring
“Driven by fears of an impending global recession, sentiment on copper remained bearish in the second quarter. On the other hand, copper’s short-term fundamentals have become increasingly bullish. The mining source disappointed in the first 4 months of 2023, according to the Global Bureau of the Metals Statistics Association (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 office. 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 those 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.
At the same time, global demand for copper has remained strong, both in OECD and non-OECD countries. In the first four months of 2023, copper demand in OECD countries increased by up to 3. 7%. Despite countless bearish articles in the monetary press, Chinese demand for copper continues to grow, with demand subtly up 8% year-on-year. An excerpt from his observation of the second quarter of 2023.
China is already gobbling up copper and copper ore at a rate, and now it needs even more. I have no doubt that China is intentionally strengthening its grip on the global copper market, as it has already done in the source chains of lithium, cobalt, and rare earths, graphite, nickel, metals, and rare earths.
“In its December Critical Minerals Strategy, Canada indexed copper as one of the six most sensitive critical minerals, along with lithium, graphite, nickel, cobalt and rare terrestrial elements, due to their importance in the blank generation sector. “Financial situation
It turns out that the West was once again discarded.
Richard (Rick) Millsaheadoftheherd subscribe to my free newsletter
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