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Case Study of Copper Prices. S&P on Copper Prices. Copper
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S&P on Copper Prices • Copper • High (but declining) levels of refined copper inventory due to soft global demand are still pressuring copper prices. Although copper prices have gradually improved to 71 cents per pound in 2003 (which is near Standard & Poor's base case assumption of 72 cents) from 65 cents per pound at the end of 2002, current price levels are still historically weak, reflecting all the uncertainties surrounding global economic performance this year. • Demand continues to play a heavy role in pricing despite the efforts by leading producers to reduce production levels (as was the case of Minera Escondida Ltda., which announced a cut of its Phase IV expansion production by 200,000 tons in 2003). So far, large copper producers such as Corporacion Nacional del Cobre de Chile (Codelco) and Minera Escondida, which operate at very competitive cost levels of below 50 cents per pound, have been able to report stable profitability, owing to improved cost positions and new technologies to increase productivity. Medium-to long-term credit trends, however, remain dependent upon global demand patterns (fundamentally reflecting infrastructure spending), and the pace of production increases (either as idled capacity is restarted or new capacity is added) when economic conditions start improving again worldwide.
History of Copper Demand • Prior to the Second World War, demand grew at an annual rate of 3.1%. • During the post war expansion years (1945 to 1973) demand grew by 4.5% per year. • Since the first oil shock of 1974, demand has grown by 2.4% per year. • During the 1990's, demand for copper has resumed at an above average rate of 2.9%.
Copper Reserves • Copper is distributed in the earth's crust and oceans in various forms and concentrations, which form the overall resource-base for copper. • Often, there are references to "world reserves" of a metal. Reserves indicate the amount of material that can be economically extracted or produced at the time of determination. Improved extraction techniques and technologies, new discoveries, depletion, and changes in economic conditions are some of the factors that alter reserve levels. For instance, world copper reserves have jumped from 90 million tones in 1950 to 280 and 340 million tones in 1970 and 1998, respectively (Source: United States Geological Survey, USGS). • Similarly, resource levels change as well. The USGS estimated in 1999 that world resources were at 2.3 billion tones of copper.
Copper Consumption per Capita • As world population continues to expand, demand for copper tends to increase as well, while remaining sensitive to variances in economic cycles, changes in technology, and competition between materials for use in applications.
Copper Cost of Production • Technology requires that copper be input in the form of copper sulphate. To get this from oxides is fairly straightforward. However, most of the world's copper does not come from oxide minerals, it comes from the sulphide mineral chalcopyrite. Sulphides carry an electrostatic charge opposite to that carried by the bubbles. The process was invented by a metallurgist who saw miners wives using it to get their husbands work clothes clean. • The costly parts of this are: • 1. Crushing (high energy consumption high capital cost) • 2. Froth flotation (high energy consumption high capital cost) • 3. Transport of concentrate (may be only 10-25% Cu, you pay for the Fe + sulphur) • 4. Smelting (High capital and energy consumption) • 5. Dissolution of smelter copper and electro winning (relatively cheap part of process).
Supply Responses to Prices • The world's third-largest copper producer, said that its idled US copper operations are unlikely to reopen for years and that it has talked to potential buyers without success. The U.S. operations (San Manuel, Arizona, Pinto Valley -- adjacent to the proposed Carlota Copper Project, and Robertson in Nevada) produce 1.7 percent of the world's copper supply. The closure helped raise copper prices from the 63 cents per pound 12-year low last March to 87 cents per pound in January. However, world production continues, including from the world's largest mine in Chile, owned by BHP. • The industry is swamped by over capacity, cheap imports, and prices near the all-time low.
