CRU Group
Copper Market Outlook
Australian Copper Conference
Richard Schodde
Brisbane March 2011
[email protected] Mount Pleasant, London
WC1X 0AD UK
Tel +44 20 7903 2000
www.crugroup.com
Key messages in a nutshell …
• Will the copper price in 2011 average more than that in
2010? Yes
• Is copper one of the favoured non-ferrous metal markets
for 2011 and beyond in price-terms? Yes
• Is the market still projected as attractive for new copper
project developers? Yes
2
In short the message is not much different to what we
said last year....
• Recovery from the Global Financial Crisis continues:
Commodity demand functions are back on track
• China still expected to provide further growth in 2011
Question: What is the likely impact of the Japanese
earthquake have on the copper sector ?
Answer: Disruptive, but overall impact on price is positive
3
When we were speaking in 2009, the world economy
was in free-fall
80
84
88
92
96
100
104
-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
index of OECD IP
Current
Mid-1970s
Early 1980sEarly 2000s
Early 1990s
months after cyclical peak
Current
Cycle
4
Then got worse;
But this time last year a recovery had set in
80
84
88
92
96
100
104
-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
index of OECD IP
Current
Mid-1970s
Early 1980sEarly 2000s
Early 1990s
months after cyclical peak
Current
Cycle
5
Now at Brisbane 2011;
the trend is back towards the boom
80
84
88
92
96
100
104
-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
index of OECD IP
Current
Mid-1970s
Early 1980sEarly 2000s
Early 1990s
months after cyclical peak
Current
Cycle
6
Asian market growth compensates for
the global market shrinkage seen in 2009
Data: CRU Analysis
y-o-y % change
7
Chinese industrial and construction activity
leads the world copper market
Data: CRU Analysis8
China now accounts for 39% of the world’s
refined copper market - up from 28% in 2008
Refined Copper Consumption in China (Mt Cu)
Data: CRU Analysis9
Forecast
Price
US$/tInvestment Factors $4,305Copper Fundamentals $5,325/t
Source: CRU Copper Price Perspective, March 2011.
Supply
Demand
Inventory
Short
term
Investors
Hedge
Funds
Index
Funds
Total
Price
Market
Shortage
China
Balance
EnergyCurrency
MARCH 2011
COPPER
EXAMPLE
Prices are driven by China and investment demand
Influenced
by Chinese
demand
10
CRU estimates that Japan’s earthquake knocked
0.6% off the annual GDP growth rate.
We expect reconstruction spend to kick-in H2
• The Tohoku earthquake and resulting
tsunami decimated local infrastructure in
Iwate & Miyagi Prefectures. Loss of
power supplies and transport has
national impact on industry
• Concerns over Japan‟s ability to pay for
reconstruction are overplayed. Public
debt might be 200% GDP. Has been
there before in the 1990s ...
• ...Don‟t forget that Japan is the 3rd
largest economy in the world with
substantial private sector surpluses
HISTORY REPEATS ?
Following the Kobe quake in Jan 1995,
reconstruction boosted growth in Japan
above earlier trend in 5 of 8 subsequent
quarters
Kobe
Quake
11
Most of Japan‟s metal production capacity is well away
from the earthquake/tsunami area. The main issue for
industry / customers is power
• Japan‟s relative importance to base
metals has declined in recent years.
But it is still a major consumer and
producer of refined metals and metal
products
• Some plants have announced
closures: due to damage during the
earthquake or due to the irregular
power supply subsequently
• It is likely that production at all
smelting and refining facilities north of
Tokyo have experienced unplanned
closures
`
TOKYO
Copper smelters/refineries
Refined copper wirerod plants
Aluminium Rolling Mills
Zinc Smelting Capacity
Lead Smelting Capacity
Nickel
Nuclear Power Facilities
Iwate Prefecture the
second largest but
lowest population
density
Miyagi Prefecture is involved
principally in agricultural and
light manufacturing - rice &
livestock, electronics,
appliances & food processing
Tohoku
Quake
The impact on global metal production
markets is likely to be small
12
PRICE FORECAST
13
20 year average
Real Copper Prices, 1908-2009 (2010 US ¢/lb)
Even though copper prices are well above historic trends…
14
… Most analysts see 2011 and 2012 copper prices
well above the 2010 average
Source: Reuters „January 2011 Base Metals Analysts‟
2010 Average Cash Price = $3.42/lb
2011 Forecast Average = $4.32/lb
2012 Forecast Average = $4.38/lb
US$/lb Cu50 Analysts price forecast for 2012
15
Substantial potential supply gap will start
opening up from 2020 onwards
Probable projects
Possible projects
World mine production, 2000-2035
(„000t contained copper in concentrates and SXEW cathode)
Existing mines
Data: CRU Analysis
Unknown projects
Firm projects
New technology
Prospects
Extra potential supply
requirement = 11.3Mt
pa Cu by 2035
Production needed
Growth = 2.5% pa
(2010 -2035)
16
Key messages in a nutshell …
• Will the copper price in 2011 average more than that in
2010? Yes
• Is copper one of the favoured non-ferrous metal markets
for 2011 and beyond in price-terms? Yes
• Is the market still projected as attractive for new copper
project developers? Yes
17
Copper price takes a breather in Q1 2011
LME 3-month contracts, % change between 31st
Dec 2010 and 21st
Mar 2011
Data: LME
Versus most other metals
Copper has underperformed in
the last quarter
18
“Torrid”
“Frigid”
“Warm Temperate”
* Relative forecast average 2014 prices versus full-year 2010 average price as a base level
Commodity Price ‘Climate Change’…. A Global Warming in Prices
CRU Commodity Price Climatic Zones – What’s hot* to 2014?
“Cool Temperate”
Alumina, Lead, Nickel, Potash, Tin,
Tungsten, Uranium, Urea, Vanadium
Aluminium, Ammonia, Coking Coal,
Copper, Molybdenum, Phosphate,
Platinum
Gold, Iron Ore, Manganese, Met Coke,
Palladium, Sulphuric Acid
Cobalt, Silver, Sulphur, Zinc
20
Key messages in a nutshell …
• Is there room for further upside price outlook to a
US$7000/t – US$7500/t copper price?
Yes
• Is copper one of the favoured non-ferrous metal markets
for 2011 and beyond in price-terms? Yes
• Is the market still projected as attractive for new copper
project developers? Yes
21
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
The immediate future in Copper is a new generation of
large projects – after a quiet decade 2000-2010
10 years of
inactivity
pro
duction (
„000 t
conta
ined C
u)
Price ($/t, nominal)
Note: the size of the bubbles is proportional to the resource size in contained Cu at start-up
Data: CRU Analysis 22
Resolution
New production reliant on South America,
but growing trend towards other locations„000t contained copper-in-concentrates and recoverable EW cathode
Growing
importance of Asia
Data: CRU Analysis 23
Forecast changes in head grades
Post-2019 there are a
number of large scale, high
grade block caves planned
By-product credits are an
important contributor to project
High grade brownfield African
deposits come on stream
High prices + mediocre projects
encouraged mining low grade deposits
% Cu
Data: CRU Analysis 24
Mine lives for Major copper producers
Xstrata: 23 Yrs
Anglo American: 28 Yrs
BHP Billiton: 35 Yrs
Rio Tinto: 38 Yrs
Freeport: 41 Yrs
Codelco: 43 Yrs
Data: CRU Analysis and MinEx Consulting
Note: Bubble-size refers to equity metal production (ktpa)
Mine Life (Years)
Majors have 400 ktpa of capacity
closing down in next decade
Existing operations and
projects under construction
Weighted Average
Mine Life
25
Majors will need to develop new projects to
fill the pipeline
Xstrata: 23 Yrs
Anglo American: 28 Yrs
BHP Billiton: 35 Yrs
Rio Tinto: 38 Yrs
Freeport: 41 Yrs
Codelco: 43 Yrs
Mine Life (Years)
Existing operations and
projects under construction
Projects at
Feasibility StageOlympic Dam
Open Pit
Data: CRU Analysis and MinEx Consulting
Note: Bubble-size refers to equity metal production (ktpa)26
M&A activity increasingly focused on buying projects
Confirmed mergers and acquisitions involving copper assets at date
of announcement vs copper price
Data: Company announcements, media, LME 27
0
5
10
15
20
25
30
35
Other
Junior Explorer
Moderate Producer
Major Producer
State Owned Enterprise
Source: MinEx Consulting Aug 2010
Only 8% of Cu metal in Top 20
deposits is held by Juniors
However not many of the undeveloped giant projects
are left to buy
Ownership patterns for the 20 largest undeveloped
copper deposits in the world.
Projects at the exploration or feasibility study stage
Mt Cu
28
And many of the projects are in challenging locations
25 out of 31 (ie 81%) of all undeveloped
projects are in High Risk or Very High
Risk Countries
Note: Country Risk as defined by the relative PPI score from the
Fraser Institute 2009/10 survey
Undeveloped Copper projects > 5mt Cu
at the Exploration or Feasibility Study StageMt Cu
Source: MinEx Consulting Aug 2010 29
Conclusions
• The main driver of the short term forecast is demand growth outstripping
anaemic growth in supply, producing a deficit of >400kt in 2011.
Visible stocks will decline to below the levels last reached in 2008 by Q4.
• While the Tohoku Earthquake will affect Japan‟s economy in the short-
term, the stimulus associated with the reconstruction will boost
metal demand. The real challenge is in overcoming the power
shortages
• Investment money will continue to be drawn in ahead of even greater
market tightness in H1 2012, thus supporting the price.
• Consumption will be constrained in 2012, due to a lack of physical
availability, with brass mills the most vulnerable. End-use consumers
will face temporary interruptions to production plans from an inability to
secure metal. Two years of high prices and limited physical availability
will prompt an intensification of substitution pressure.
30
Conclusions … continued
• A surge in mine production is due to start in 2012, which will be
the first of three straight years of refined production growth of over
1Mtpy. This will produce surpluses in 2013 and 2014, but the stock
build will be modest. As a result, the price will be supported and
begin to rise again in 2015 ahead of tighter market conditions further
out.
• A large potential supply gap could open up from 2020 onwards –
this will stimulate additional new mines. Many of these will be in new
countries
• M&A activity is picking up – especially for undeveloped projects.
31
THANK YOU
Richard SchoddeMelbourne
Tel: +61 418 909 769
Email: [email protected]
Philip Sewell
Sydney
Tel: +61 418 290 342
Email: [email protected]
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