abare.gov.au - Australian commodities – December quarter . volume 15 . number 4 2008

Copper

Michael Lampard

In the first eight months of 2008, copper traded on the London Metal Exchange at an average of US$8100 a tonne. This represented record high prices brought about by continued concern over mine supply. Since then, the copper price has declined sharply to less than US$3200 a tonne as the global financial crisis has adversely affected prospects for world economic growth and thus growth in copper consumption in the short term. For 2008 as a whole, the copper price is estimated to average around US$7000 a tonne, 2 per cent lower than in 2007.

Copper price to average significantly lower in 2009

In 2009, the copper price is forecast to average around US$3300 a tonne, 53 per cent lower than 2008, because of significantly weaker global demand. Copper stocks are forecast to increase by around 330 000 tonnes to 3 weeks of consumption by the end of 2009. At this forecast level, copper stocks will remain below the historical average as lower ore grades, labour disruptions and equipment failure could continue to constrain supply growth.

Weak consumption growth in 2008 and 2009

Consumption of refined copper is estimated to have increased marginally to 18.1 million tonnes in 2008, as demand from OECD economies contracted and growth in the emerging economies slowed in the second half of the year. Weak global consumption growth for 2008 reflects the combined effect of record high prices in the first half of the year and reduced demand as a result of the recent global financial crisis.

In 2009, consumption of refined copper is forecast to increase by around 1 per cent to 18.3 million tonnes. China and other developing countries are forecast to account for most of this growth as OECD consumption is expected to remain flat for the year as a whole.

China’s consumption to remain strong…

In the first nine months of 2008, China’s copper consumption increased year on year by 4 per cent. For 2008 as a whole, China’s annual copper consumption is estimated to have increased to around 5 million tonnes. In 2009, China’s copper consumption is forecast to increase by a further 6 per cent to around 5.4 million tonnes. Despite the assumption of lower economic growth in China and declining economic growth in China’s major export markets, continued urbanisation in China and its expanding electricity transmission and distribution capacities are expected to provide support for copper consumption. In addition, the Chinese Government’s fiscal stimulus package, designed to increase investment demand, is also expected to increase China’s consumption of copper as investment in housing and electricity transmission and distribution capacity increases.

…but OECD consumption to decline

In contrast, OECD demand is estimated to have fallen in 2008 as many economies underwent a slowdown in their manufacturing and housing sectors as a result of the global financial crisis. This trend is expected to continue until the second half of 2009 when OECD economic growth is assumed to gradually recover.

In the United States, the world’s second largest copper consumer, consumption is estimated to have declined by 4 per cent in 2008 and is forecast to fall by a further 3 per cent in 2009. The forecast decline in 2009 mainly reflects weakness in the US residential construction sector, which accounts for around 40 per cent of US domestic copper consumption. In October 2008, housing permits and housing starts, two leading indicators of residential construction, recorded historical lows.

Copper outlook

2007

2008

2009

% change

World

Production

– mine

15 561

15 727

16 256

3.4

– refined

17 972

18 165

18 596

2.4

Consumption

18 026

18 124

18 260

0.8

Closing stocks

683

724

1 060

46.4

– weeks consumption

2.0

2.1

3.0

42.9

Price

US$/t

7 133

6 976

3 273

– 53.1

USc/lb

323.5

316.4

148.4

– 53.1

2006-07

2007-08

2008-09

Australia

Mine output

859

863

924

7.1

Refined output

435

444

508

14.4

Exports

– ores and conc.

1 493

1 695

1 639

– 3.3

– refined

290

296

351

18.6

– total value

A$m

6 526

6 747

5 064

– 24.9

f ABARE forecast.

World mine production growth limited in 2008…

World mine production is estimated to have increased by 1 per cent to 15.7 million tonnes in 2008 as the scheduled commencement of new capacity offsets significant supply disruptions caused by labour disputes, equipment failure and lower ore grades. Growth in mine supply is expected to come from Zambia, the Democratic Republic of Congo, the United States and Peru where an estimated 670 000 tonnes of capacity was added in 2008. In Chile, the world’s largest copper producer, capacity is expected to increase following the completion of Xstrata’s Collahuasi debottlenecking (105 000 tonnes a year) and Codelco’s Gaby project
(165 000 tonnes). Despite these large capacity increases, production in Chile is estimated to have declined in 2008 as supply disruptions over the year significantly reduced mine production. Most notable was equipment failure at Escondida which cut production at the world’s largest copper mine by 10 per cent. This occurred at a time when the mine’s output was already constrained by lower ore grades.

Unlike other base metals, voluntary changes to mine production in response to lower copper prices were uncommon in 2008 as production costs remained below current prices for a majority of large producers. Nevertheless, production in 2009 is forecast to be lower than previously expected as supply continues to be constrained by lower ore grades, technical difficulties, equipment failure and lower prices. In 2008, the world’s mine utilisation rate is estimated to have been between 80 and 85 per cent. This compares with an average mine utilisation rate of 90 per cent over the past decade.

…although increasing moderately in 2009

In 2009, world copper mine production is forecast to increase by 3 per cent to 16.3 million tonnes as new projects in Africa, Chile and Australia are commissioned. In Chile, mine production is expected to increase as Codelco’s Andina (120 000 tonnes a year) and Lomas Bayas (10 000 tonnes) mines are commissioned.

Elsewhere, production is expected to come from Katanga’s KOV restart (250 000 tonnes) and Freeport’s Tenke Fungurume (110 000 tonnes), both in the Democratic Republic of Congo, and OZ Minerals’ Prominent Hill (120 000 tonnes) in Australia. Although capacity is forecast to increase significantly in 2009, supply constraints including lower ore grades and equipment failures may persist throughout the year, presenting a downside risk to this production forecast.

Refined production expanding in 2008 and 2009

World refined copper production is forecast to rise by 2 per cent in 2009 to 18.6 million tonnes, following an estimated increase of 1 per cent to 18.2 million tonnes in 2008. The forecast rise in 2009 mainly reflects capacity expansions in China, Chile and Africa.

In China, refining capacity has increased in 2008 and is expected to expand further in 2009 as new capacity comes on line. Despite large increases in China’s refining capacity, refined output is forecast to grow at a slower rate in 2009 as smelters respond to lower prices. Another factor constraining refined production growth is forecast low treatment and refining charges (the payment received by smelters for refining copper). Limited availability of copper concentrates, as a result of mine disruptions, is expected to result in low treatment and refining charges in 2009 as smelters compete for the limited feedstock. This, combined with lower prices for sulphur (produced as a by-product in the smelting process) may place further pressure on refiners to reduce production.

Elsewhere, refined production in Chile and the Democratic Republic of Congo is forecast to increase as new solvent extraction electrowinning projects (see box) commence operation. These projects include the Andina project (120 000 tonnes a year) in Chile and the Tenke Fungurume (110 000 tonnes) and KOV restart (250 000 tonnes) projects in the Democratic Republic of Congo.

Solvent extraction-electrowinning (SX-EW)

Solvent extraction-electrowinning uses copper oxide ores. It is a hydrometallurgical process, as the copper is either in an aqueous or organic environment during processing until it is reduced to a metal form. This process involves leaching the material with a weak acidic solution (generally sulfuric acid). The solution (pregnant liquor) is then recovered and contacted with an organic solvent (extractant) in the solvent extraction phase. This extracts the copper and leaves most of the impurities in the leach solution. The copper-bearing material is advanced to the electrowinning stage, while the leach solution is returned to the solvent extraction stage. In the electrowinning stage the copper is reduced electrochemically from the copper sulfate solution to a cathode.

SX–EW has a number of benefits over conventional processing, including the production of pure cathode on site, the ability to treat lower grade ores and its suitability for both small and large-scale projects. However, the SX–EW process is electricity intensive, so the economics of production are sensitive to electricity costs.

Australian export earnings to decline

Australian copper mine production is forecast to increase by 7 per cent in 2008-09 to around 925 000 tonnes. New production from OZ Minerals’ Prominent Hill (120 000 tonnes a year) and Compass Resources’ Browns oxide project (10 000 tonnes), is forecast to account for most of this growth.

Mine closures as a result of the falling copper price have so far been limited to Barminco’s Eloise (16 000 tonnes), Matrix Metals’ Leichhardt mine (9000 tonnes) and CopperCo’s Lady Annie project (20 000 tonnes). Declining prices have not significantly reduced Australian copper mine production as the costs of production for most large producers remain below current prices.

Reflecting higher domestic production of ores and concentrates and expansions to SX-EW capacity, refined copper production in 2008-09 is forecast to increase by 14 per cent to more than half a million tonnes. Contributing to this growth is expected higher output from the Townsville Copper Refinery and increased SX-EW production from Compass Resources’ Browns Oxide project.

In 2008-09, Australia’s export earnings from copper are forecast to decline by 25 per cent to around $5 billion. The forecast sharply lower prices are expected to more than offset the effect on export earnings of an expected increase in export volumes and an assumed depreciation of the Australian dollar.