In the first eight months of 2007, copper prices averaged just over US$7000 a tonne (US318c/lb), 8 per cent higher than in the corresponding period of 2006. Strong demand in China and a number of small supply disruptions provided continued support for prices over this period.
prices to remain high in 2007 and 2008
In 2007, world copper prices are forecast to increase by 5 per cent to US$7080 a tonne (US321c/lb). World refined production is forecast to increase by 4 per cent to 18.2 million tonnes despite the likelihood of some disruptions to copper concentrate supply. World copper consumption in 2007 is forecast to increase by 5 per cent to 18.0 million tonnes, with demand from China expected to remain strong. With production forecast to exceed consumption, global copper stocks are forecast to rise to 2.3 weeks of consumption.
World copper prices are forecast to average just under US$7000 a tonne (US316c/lb) in 2008. Production is forecast to exceed consumption for a second year in succession. As a result, stocks are forecast to increase to 2.5 weeks of consumption. However, if the variability in concentrate supplies continues to adversely affect refined production, prices are likely to rise, presenting an upside risk to this assessment.
consumption to increase in China …
In the first half of 2007, world copper consumption increased by 6 per cent year on year, with China the main driver. China’s consumption of copper increased by 40 per cent year on year in the first half of 2007, reflecting continued strong growth in the economy and industrial production. Underpinned by rapid expansion in economic activity in China, output of copper intensive goods rose strongly in the first seven months of 2007. For example, production of motor vehicles, personal computers and air conditioners increased by 19 per cent, 50 per cent and 44 per cent, year on year, respectively. Over the same period, investment in fixed assets — of which new construction is a major component — increased by 27 per cent.
For the remainder of 2007 and in 2008, continued industrialisation, urbanisation and the expansion of electric power output are expected to underpin Chinese copper consumption. The power industry accounts for around half of China’s copper consumption. According to the National Development and Reform Commission, an additional 95 gigawatts of capacity — around 15 per cent of China’s 2006 installed capacity — is expected to be connected to the electricity grid in 2007.
… but to decline in the United States in 2007
In the first half of 2007, US copper consumption declined by 8 per cent year on year, largely as a result of continued weakness in the residential housing market. The troubles in the US subprime mortgage sector and associated tighter credit conditions have had a negative influence on the demand for new housing. In the first half of 2007, construction spending and new residential home sales declined by 4 per cent and 22 per cent respectively, reflecting the slowdown in housing construction financed by the subprime market.
The extent to which the fallout in the US subprime mortgage market will continue to flow through to housing markets in the United States for the remainder of 2007 and 2008 is not certain. The stance on monetary policy by the US Federal Reserve will be a key determining factor. In this set of forecasts, it is assumed that there will be a gradual recovery in residential construction activity and sustained nonhousing consumption. Against this background, US copper consumption in 2008 is forecast to increase by 2 per cent to 2.1 million tonnes.
mine production to expand
In 2007, world copper mine production is forecast to increase by 4 per cent to 15.9 million tonnes as a result of the commissioning of a number of new projects. Additional copper mine capacity is expected from Freeport’s Cerro Verde expansion in Peru (an increase of approximately 145 000 tonnes a year), which was commissioned in early 2007, and the restart of BHP Billiton’s Pinto Valley operations in the United States (70 000 tonnes a year) that were mothballed in 1998.
World copper mine production in 2008 is forecast to increase by a further 8 per cent to 17.1 million tonnes as new projects in Chile, the United States and Zambia are commissioned. In Chile, Codelco plans to commission its Gaby project (150 000 tonnes a year capacity) and expand output at Andina (by 80 000 tonnes a year). Anglo American and Xstrata plan to increase production at the Collahuasi mine by 105 000 tonnes a year following a debottlenecking program. In addition, Xstrata also plans to increase production at its Lomas Bayas mine (by 10 000 tonnes a year) in late 2008.
Elsewhere, additional capacity is expected to come from Freeport’s Safford mine (109 000 tonnes a year) in the United States and Equinox Minerals’ Lumwana mine (169 000 tonnes a year) in Zambia.
lower treatment and refining charges to affect Chinese smelters
World refined copper production is forecast to increase by 4 per cent to 18.2 million tonnes in 2007 and by a further 4 per cent to 18.9 million tonnes in 2008 in line with capacity expansions in China and Chile.
China’s refined copper production is expected to expand strongly in 2007 and 2008 through the anticipated commissioning of more than 900 000 tonnes of new capacity. This includes Jiangxi Copper’s expected expansion of its Guixi smelter by 300 000 tonnes a year by the end of 2007.
Despite planned additions to capacity, China’s refined copper production is likely to be adversely affected by tight supply demand conditions for raw materials. Chinese copper smelters import copper concentrates based on the LME three month copper price and receive treatment and refining charges for turning the concentrates into refined copper (see box).
treatment and refining charges
Unlike copper metal, there is no formal exchange for copper concentrates. Instead, prices are established through negotiations between the buyer (smelter) and the seller (mine). When the mine sells concentrates to the smelter, the mines are paid for a portion of the copper metal and any byproducts and penalised for impurities contained in the concentrate. In addition, the smelter will impose a treatment and refining charge and retain some exposure to the copper price, when it is above or below a prespecified value, through what is called price participation. Treatment and refining charges are negotiated annually and fluctuate depending on the underlying balance in the copper concentrates market.
Price participation typically involves an extra payment to smelters when the price of copper exceeds a certain value (normally 90 cents a pound). The payment is equal to a certain percentage (generally 10 per cent) of the difference between the purchase price and the market price.
Usually, treatment and refining cost contracts are two years in duration, known as a brick contract. Under a brick contract, half of the copper concentrates will be taken under the current year terms and the other half under the previous year’s terms.
In 2006, treatment and refining charges were higher than 2007 terms, reflecting a greater availability of copper concentrates. Since concentrates are sold through brick contracts, it will take some time before the recently negotiated low treatment and refining charges are fully reflected in the revenues earned by smelters. In addition, 2008 will be the first year in which smelters will not benefit from price participation — that was not included in 2007 contracts — increasing the financial pressure on smelters. If concentrate availability remains tight (which is expected to be the case), then smelters are likely to have to accept another cut in contract terms in 2008 negotiations.
In July, Tongling Smelting group — the second largest copper smelter in China with an annual capacity of 600 000 tonnes — signed a copper concentrate supply contract with BHP Billiton, with treatment and refining charges of $50 a tonne and 5 cents a pound with no price participation. This contract is in line with other settlements this year between miners and smelters and reflects a situation where global supplies of copper concentrates are growing more slowly than demand. In 2006, benchmark annual terms were around $95 a tonne and 9.5 cents a pound with price participation (see box). As a result, Chinese smelters are facing increasing financial pressures as they can no longer cover the cost of purchasing and processing imported concentrates at current prices.
copper outlook
2006
2007
f
2008
f
% change
World
Production
– mine
kt
15 234
15 883
17 102
7.7
– refined
kt
17 437
18 154
18 940
4.3
Consumption
kt
17 142
18 044
18 859
4.5
Closing stocks
kt
703
813
894
10.0
– weeks consumption
2.1
2.3
2.5
8.7
Price
US$/t
6 741
7 082
6 975
– 1.5
USc/lb
305.8
321.2
316.4
– 1.5
2005-06
2006-07
2007-08
f
Australia
Mine output
kt
933
855
998
16.7
Refined output
kt
461
435
572
31.5
Exports
– ores and conc.
kt
1 635
1 512
1 420
– 6.1
– refined
kt
314
290
445
53.4
– total value
A$m
5 653
6 543
7 384
12.9
See back tables for details. s ABARE estimate. f ABARE forecast.
In response, the China Smelter Purchase Team — a group of nine Chinese smelters comprising Jiangxi Copper Group, Tongling Nonferrous, Yunnan Copper, Jinchuan Group, Zhongtiaoshan Nonferrous Metals Group, Baiyin Nonferrous Metals Group, Daye Nonferrous Metals, Yantai Penghui and Chifeng Jinjian Copper — has agreed to cut output by 10–15 per cent in the second half of 2007. In 2006, the China Smelter Purchase Team accounted for 81 per cent of China’s copper concentrates imports and 68 per cent of China’s refined metal production.
In Chile, additional capacity includes BHP Billiton’s Spence SX–EW (solvent extraction – electrowinning) project (200 000 tonnes a year) that was commissioned at the end of 2006 and the expected commissioning of Codelco’s Gaby SX–EW project in 2008.
Australian export earnings to increase
In 2006-07, Australian copper mine production declined by 8 per cent to around
855 000 tonnes largely as a result of lower production at the three largest copper mines in Australia. Production at BHP Billiton’s Olympic Dam mine in South Australia declined by 11 per cent year on year because of ongoing maintenance and the mining of lower grade ore. In addition, production at Xstrata’s Ernest Henry and Mount Isa mines declined by 32 per cent and 14 per cent respectively as they mined lower grade ore and experienced operational difficulties at the Mount Isa mine.
Australian copper mine production in 2007-08 is forecast to increase by 17 per cent to 998 000 tonnes as a number of new projects are commissioned. Copperco’s Lady Annie mine in Queensland (25 000 tonnes a year), Compass Resource’s Brown’s Oxide mine in the Northern Territory (10 000 tonnes a year), Matrix Metals Leichhardt operation in Queensland (10 000 tonnes a year) and Jabiru Metals Jaguar mine in Western Australia (9600 tonnes a year) are all expected to begin production in mid to late 2007.
Production of refined copper in Australia declined by 6 per cent in 2006-07 to around 435 000 tonnes as higher production from Xstrata’s Townsville copper refinery was more than offset by lower production from Olympic Dam. In 2007-08, Australian refined copper production is forecast to increase by 32 per cent to 572 000 tonnes as a result of expected higher output from the Townsville copper refinery (an expansion of 20 000 tonnes) and the commencement of SX–EW production from the Leichhardt, Lady Annie and Brown’s Oxide operations.
After increasing by 16 per cent in 2006-07, Australian copper export earnings in 2007-08 are forecast to increase by a further 13 per cent to $7.4 billion. A forecast 53 per cent rise in the volume of refined copper exports is expected to more than offset the effect on earnings of forecast lower export prices and an appreciation of the Australian dollar.
kpenney@abare.gov.au