CU AT THE TOP COM­MOD­ITY FO­CUS: COP­PER

Cop­per is in favour as de­mand picks up in China, while elec­tric ve­hi­cle and the re­new­ables boom looks to build sus­tain­able price mo­men­tum into the fu­ture. Yet the base metal, as is the case for many com­modi­ties in 2017, has also been de­fined by its volati

The Australian Mining Review - - CONTENTS - ELIZ­A­BETH FABRI

COP­PER has been a par­tic­u­larly in­ter­est­ing com­mod­ity to watch through­out the 2017 year.

On the back of sud­den price gains in late 2016, the base metal had a volatile start to the year, con­tin­u­ing its up­swing in the first few months (due to sup­ply dis­rup­tions at three of the world’s largest mines) be­fore plum­met­ing to three-month lows in April.

As an­a­lysts pre­dicted, the slump was short-lived with prices surg­ing again in July on re­newed op­ti­mism amid de­mand growth in China and a weaker US dol­lar.

By mid-Oc­to­ber, prices spiked fur­ther to $US7186 a tonne, be­fore set­tling at $US6800 a tonne at the end of the month; still a 24 per cent in­crease on Jan­uary lev­els.

While there has been much de­bate on where the cop­per will sit mov­ing into the New Year, a com­mon thread among an­a­lysts is that the long-term fun­da­men­tals for the metal re­main strong.

KPMG na­tional and global cop­per leader Mar­itza Araneda said de­spite re­cent volatil­ity prices were headed in the right di­rec­tion.

“In my view, the mar­ket should swing into a deficit (un­der­sup­ply) po­si­tion in early 2018, mean­ing that cop­per prices should not drop below cur­rent price lev­els,” Ms Araneda said.

“This is good news for min­ers who have gone through dif­fi­cult times over the last two years and have had to re­duce costs to man­age their cash flows.

“There is also po­ten­tial for fur­ther up­side in the near term; sup­ply dis­rup­tions may con­tinue in the sec­ond half of 2018, as a num­ber of mines in Chile have worker con­tracts up for re­newal.

“Ac­cord­ingly, grad­ual price in­creases should start to be more pro­nounced from Q3 2018 on­wards and this time the higher prices will be here to stay.”

S&P Mar­ket In­tel­li­gence se­nior re­search an­a­lyst Adam Webb was also op­ti­mistic, but warned of in­creased year-on-year min­ing costs.

Mr Webb said since early last year, which marked an ar­rest in the cop­per price de­cline that had been in ev­i­dence since 2011, there has been less pres­sure to cut costs at cop­per min­ing op­er­a­tions.

“How­ever, since early 2016 many lo­cal pro­ducer cur­ren­cies have strength­ened against the US dol­lar, along­side a strength­en­ing oil price, which has led to some up­ward pres­sure on cop­per min­ing costs,” Mr Webb said.

“To­tal cash costs in the cop­per-min­ing sec­tor are ex­pected to be ap­prox­i­mately 6 per cent higher in 2017 com­pared with 2016.”

Look­ing ahead into 2018, Mr Webb ex­pected only 2 per cent of cop­per sup­ply to have an AISC above the fore­cast cop­per price for the year, sig­nalling lit­tle pres­sure for cop­per min­ers to cut pro­duc­tion.

“We ex­pect profit mar­gins to end this year sig­nif­i­cantly higher than in 2016, and that those mar­gins will be pre­served into 2018 and 2019,” he said.

Deloitte En­ergy & Re­sources in­dus­try group au­dit part­ner Ryan Hansen said cop­per fu­tures on COMEX trad­ing were cur­rently at their high­est since Fe­bru­ary 2014, with the mar­ket bullish for ‘good rea­sons’.

“Cop­per’s sup­ply/de­mand fun­da­men­tals are some of the best in the com­mod­ity pack,” Mr Hansen said.

“You have the com­bi­na­tion of long-term struc­tural sup­ply con­straints (fall­ing ore grades, sup­ply dis­rup­tions at key cop­per mine op­er­a­tions, slow­ing global mine sup­ply growth, short­age of world class cop­per de­posits, etc) to­gether with some de­cent de­mand side sup­port.

“Cop­per’s a clas­sic ‘bell­wether’ com­mod­ity with cop­per de­mand and prices highly cor­re­lated with eco­nomic ac­tiv­ity.”

How­ever, Mr Hansen said there was “sig­nif­i­cant cau­tion to be had” around the large quan­tity of spec­u­la­tive cap­i­tal in cop­per.

“There’s a sense cop­per prices are cur­rently run­ning ahead of fun­da­men­tals and are not sus­tain­able at this level,” he said.

“The risk of so much hot money go­ing into cop­per is it can eas­ily be pulled out if per­ceived re­turns are higher else­where or there’s a neg­a­tive eco­nomic shock some­where.”

Mr Hansen said the big con­cern was a slow­down in China’s prop­erty sec­tor, but if this cor­rected it­self, so too will cop­per de­mand and pricing.

Re­newed fo­cus

Armed with this knowl­edge, global pro­duc­ers such as BHP were shin­ing a light on their cur­rent cop­per op­er­a­tions and path­ways to ramp up pro­duc­tion to meet de­mand.

At the LME Week Bloomberg Fo­rum in Lon­don early Novem­ber, BHP Amer­i­cas op­er­a­tions pres­i­dent Daniel Malchuk said the miner was ac­tively look­ing to add more cop­per re­sources to its port­fo­lio.

“Cop­per has had great fun­da­men­tals for some time, and great po­ten­tial due to the rapid rise in re­new­ables and elec­tric ve­hi­cles,” Mr Malchuk said.

“So­lar re­quires about five kilo­grams of cop­per per kilo­watt – that’s more than dou­ble the cop­per in­ten­sity than al­ter­na­tive forms of gen­er­a­tion.

“Now turn­ing to the high­ways, a hy­brid car uses 40 kilo­grams of cop­per – that’s twice the amount of cop­per a reg­u­lar petrol car uses.

“This is an enor­mous amount of cop­per to source.”

Mr Malchuk said BHP was well placed to sup­port in­creased cop­per sup­ply but faced a num­ber of chal­lenges in­clud­ing; de­clin­ing grades, deeper de­posits, harder ore, labour pro­duc­tiv­ity, wa­ter scarcity, and higher ex­pec­ta­tions from host gov­ern­ments and com­mu­ni­ties.

“Grade de­cline alone has huge ram­i­fi­ca­tions; in­dus­try grades are ex­pected to de­cline by 17 per cent ac­cord­ing to Wood Macken­zie data over the next decade,” he said.

“Age­ing mines re­quire more ef­fort and cost to de­liver the same pro­duc­tion.

“There will be a grow­ing need for de­sali­nated wa­ter to process the higher vol­umes of lower-grade ore.”

Mr Malchuk said BHP was in­vest­ing in ex­plo­ration to un­cover po­ten­tial new dis­cov­er­ies closer to the sur­face.

“Based on to­tal re­fined cop­per out­put, the value of the cop­per mar­ket could in­crease by over 50 per cent by 2035 – an op­por­tu­nity worth seiz­ing,” he said.

“Now you see why cop­per is firmly on our radar.”

“Ac­cord­ingly, grad­ual price in­creases should start to be more pro­nounced from Q3 2018 on­wards and this time the higher prices will be here to stay.”

Image: BHP.

Es­con­dida cop­per mine, Chile.

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