Cop­per is still cheap, de­spite its surg­ing price

Zambian Business Times - - COMMODITIES - Source: Fi­nan­cial Times

Sup­ply re­stric­tions will be hard to un­pick as global de­mand ramps up

COP­PER bells are ring­ing to warn us we are in the late cy­cle when me­tals prices have their sud­den and un­ex­pected up­ward moves. Un­ex­pected, that is, for cen­tral bank macroe­conomists, sup­ply-chain-stretched man­u­fac­tur­ers and off-the-shelf in­vest­ment al­gos.

This is not just a China story, or un­sus­tain­able spec­u­la­tive de­mand. Spec­u­la­tive in­ter­est in cop­per fu­tures is quite low, par­tic­u­larly con­sid­er­ing that the price of the me­tal is up more than 60 per cent over the past two years. Min­ing com­pa­nies’ man­agers still have a bat­tered-child syn­drome af­ter the 2015-2016 pause in Chi­nese im­port growth.

There is lit­tle ex­u­ber­ance, ra­tio­nal or ir­ra­tional. De­spite their large cash hoards and cash flows, none of the ma­jor com­pa­nies is propos­ing to shoot a rocket loaded with cop­per into the as­ter­oid belt, or even in­vest enough to main­tain pro­duc­tion.

So world cop­per pro­duc­tion dropped more than 2.5 per cent last year, as de­clin­ing ore grades and labour strikes more than off­set the out­put of new mines or ex­panded pro­duc­tion at ex­ist­ing mines. This was mostly be­cause of de­clines in ore grades and de­lays in com­mis­sion­ing new ca­pac­ity.

A macroe­conomist at a cen­tral bank would tell you that, with the price a lit­tle above $7,100 a tonne, and the world mar­ginal cost of pro­duc­tion around $5,000 a tonne, there should be a wave of new in­vest­ment in cop­per ca­pac­ity. And there would be, if the en­gi­neer­ing, eco­nomics and pol­i­tics of the cop­per in­dus­try were any­thing like those of the Amer­i­can un­con­ven­tional oil and gas busi­ness.

They are not. As Paul Gait of Bern­stein Re­search in Lon­don says: “There are hun­dreds of thou­sands of oil wells in the world, but there are only about 700 cop­per mines. The 20 largest mines pro­vide half of the to­tal sup­ply. That means that the sup­ply re­sponse is not at all a con­tin­u­ous func­tion.”

‘ You have to ei­ther go to Africa or go un­der­ground’ to get new cop­per sources Paul Gait The lead time on build­ing a new mine, or even a plant to ex­tract cop­per from mine tail­ings, is much longer than re­quired for most oil­fields. Cop­per has been the ob­ject of ex­plo­ration for a very long time, and the eas­ily ac­cessed, high-grade oil bod­ies were dis­cov­ered decades ago. Min­ers have ex­tracted cop­per from thin­ner and thin­ner ore grades with more cap­i­tal and tech­nol­ogy. That is be­com­ing near im­pos­si­ble to ac­com­plish with the cur­rently mined ore bod­ies in po­lit­i­cally sta­ble ar­eas.

As Mr Gait says: “You have to ei­ther go to Africa or go un­der­ground” to get new cop­per sources. Go­ing un­der­ground means sink­ing shafts a thou­sand me­ters down to blast and bur­row out huge caves to ac­quire the ore. The time from in­vest­ment de­ci­sion to pro­duc­tion is mea­sured in decades, as­sum­ing the en­vi­ron­men­tal per­mit­ting prob­lems can be over­come. This as­sumes the min­ing en­gi­neers and skilled work­ers can be found.

In the past few weeks min­ers have found out more im­pli­ca­tions of what go­ing to Africa can mean. The Demo­cratic Repub­lic of Congo has an­nounced its in­ten­tion to im­pose retroac­tive in­creases in roy­al­ties and taxes, de­spite its ap­par­ent con­trac­tual com­mit­ments. The com­pa­nies have protested, and there will be long ne­go­ti­a­tions and lit­i­ga­tion. The ores in the DRC and else­where in Africa are an or­der of mag­ni­tude richer than can be found in more pre­dictable places. They have just too much po­lit­i­cal risk, though, to at­tract more money.‘

The real fun in the cop­per world this year, how­ever, will be in Chile, the source for about 6m tonnes of the world’s 20m tonnes of an­nual pro­duc­tion. There are labour dis­putes at mines com­pris­ing more than three-quar­ters of Chile’s ca­pac­ity. If just a frac­tion of those 6m tonnes — say 1m tonnes — were to be taken off­line be­cause of strikes, the re­sult­ing price move­ment would be very ed­u­ca­tional.

Chilean min­ers, not to men­tion their union lead­er­ship, know all about the lack of spare ca­pac­ity in the world. There would be no ob­vi­ous way to make up for such a pro­duc­tion short­fall quickly. There is a lack of aware­ness of how cop­per-in­ten­sive a shift away from fos­sil fuel en­ergy will be. Trans­mis­sion grids need more cop­per for re­new­able gen­er­a­tion. Elec­tric ve­hi­cles re­quire more cop­per than diesel or gas ve­hi­cles. Fac­tory and of­fice work­ers in hot coun­tries need air con­di­tion­ing to work ef­fi­ciently, which also re­quires more cop­per. All the myr­iad lit­tle elec­tric mo­tors we take for granted need cop­per. Am­mu­ni­tion for war uses a lot of cop­per. Yet cop­per has not been a po­lit­i­cal or fi­nan­cial is­sue in re­cent years. Me­tal min­ing is dirty and dis­tant. The tech­nol­ogy can be im­proved and cap­i­tal added, but slowly. The smart peo­ple who might have done that went into soft­ware en­gi­neer­ing or me­dia stud­ies. The first re­ac­tion of con­sumers, man­u­fac­tur­ers and politi­cians will be to ac­cept the cop­per price in­creases that will be cre­ated by the tight sup­ply con­di­tions. It will take a lot of de­mand de­struc­tion to match a stag­nant, choppy and de­plet­ing sup­ply. That will hap­pen later in the cy­cle than rises in rates and de­clines in eq­uity prices. Cop­per and cop­per com­pa­nies are cheap and in­ter­est­ing.

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