Copper: Outlook in 2011
(2) copper price

Copper price

A great number of mines concentrators and smelters are required to produce the 15.8 Mt of copper required by the world copper using industries (2009), mainly electricals, electronics, buildings and household appliances. World copper production is increasing with economic growth particulary with the emerging economies of the world. Copper price is determined by the demand of these industries and the ability of copper producers to match that demand at that price. A complex relation of demand, supply, costs and prices intervene, in which all levels of the chain affect the economy of the global copper industry.

The cost of production results from the cost/price of the last producer that contributes to building up global production and demand - this is the concept of market price equalling to marginal cost of production when there are many producers. Copper producers can be distributed by drawing a cumulative curve production versus cost of production (typical diagram with 1997 data). But copper prices are very volatile due to variations in the relation of demand and supply with economic cycles. Particularly, the financial and economic crisis of 2007-2009 provoked a sharp decline of demand whereas the capacity of supply had increased in the previous years, in response to, and in anticipation of, the continued growth of the global economy.

The capacity to make stocks of refined copper, contrary to electricity for which consumption must equal production exactly at all times, enable to adjust supply and demand at short and medium term. This function is assured by the London Metal Exchange (LME), an international institution that holds stocks in various warehouses in the world in close association with producers and traders. Spot price volatility can then be ignored and one may consider annual averages or 3 month sliding averages. This graph from the World Bank (link). shows copper prices on monthly average basis from 2000 through 2010. This more sophisticated graph from the International copper study group ICSG gives a better view of LME stocks and price trends (link)

There is a significant increase of copper prices and volatility since year 2006. The trough corresponds to the financial crisis that caused the economic downturn during 2007-2010. This upward trend of price and its volatility is related the economic growth of China, India, Brazil and other emerging economies, and the difficulty of supply sources to match demand at all times. When demand exceeds supply, mines are constrained by geologic resources, limited capacities of mining and concentration that were designed for specific orebodies; expansions depend on geology (resources), orebody characteristics which govern processes investment and costs, financing restrictions, and the required profitablity of such expansions in view of operating costs and anticipated prices. Developing new reserves imply very long lead times of the order of 10-20 years. Smelters are also constrained but less, because these are fixed facilities that are not affected by depletion of the geological resource.

However, as of 2010 and even 2011, there are still significant excess mine and smelter capacities as shown in these two tables extracted from International copper study group: table1 shows "World refined copper production and usage trends 2006-2011" (link);table2 shows "Copper mine, smelter, refinery production and refined copper usage BY geographical area" (link).

In the mid 1990s, many copper mines and smelters had red bottom lines due to low price of copper. To reduce costs most of the majors went through mergers and restructuring processes particularly in North and South America. Others that did not restructure or merge became opportunities for investors looking for high return prospects. It was the time when Mark Rich (that later became Glencor) and others, acquired mines, concentrators, smelters and refineries in differents parts of the world, particularly in the ex Soviet Union, Zambia and DRC. In the ex Soviet Union eg. Kazakstan and the Urals, it was the result of the collapse of the Soviet Union. In Zambia, it was due to the withdrawal of Anglo-American. In DRC it was due to the withdrawal of Union Minière, its replacment by Gecamines and the latter's bankrupcy. High returns on investment were made possible by acquiring properties available on the market with heavily discounted or almost nil values. With some investment made on revamping and/or modernising plants, and with favorable government conditions on taxes and profit repatriation, attracted a number of investors with no or little experience in mining, beneficiation, smelting and refining of copper. Typically, the was the case of Mark Rich - a trader in metals - that became Glencore (links).

Mis à jour le 24/09/2011