Is There a Gloomy Forecast for Copper, or Will it Trumpet in at $5/Pound?

By Jim Williams

“The mining sector is very vulnerable to cycles,” states Javier Targhetta, senior vice-president at Freeport-McMoRan Inc. “When there is a boom, mining companies hold big gala dinners, with chandeliers and trumpets, but when the market is down, everyone has gloomy faces and exploration stops.”

Well, it appears the gloomy faces may be around for a while. But don’t pack the chandeliers and trumpets too deep in the closet – you may need them in a couple of years.

Those are some of the headlines coming out of the Metal Bulletin Conference in Shanghai.

Growth in demand of 3 to 4 percent annually over the next five years means four to five million tons of new supply would have to be found, the equivalent of 10 to 12 big mines, Targhetta told conference attendees.

“But where are those mines? I don’t see any of those. We may see two or three big productions in the next few years but the impact will be diluted by falling production and grades. So I’m extremely optimistic as for where markets will be.”

Another key player in the copper community agrees with the short-term price of $3-$3.50, but Nelson Pizzaro, chief executive of top copper producer Codelco, predicts prices could hit a record $5 a pound ($11,000 a ton) over the next four to five years.

Copper prices could be held down by rising supply from mines in the next couple of years but are set to surge after that due to a dearth of monster projects and bottlenecks at refineries, senior executives at top copper producers said last week.

For 2015, the president of Southern Copper Corporation, Oscar Gonzalez Rocha, saw the price at about $3.15 a pound.

“With demand recovering in the U.S. and Europe, and Chinese copper consumption growth maintaining at current levels, we see 2015 copper prices at about $3.15 a pound with quite a lot of upside potential,” he said.

Weakness in China’s property sector has fuelled worries about global economic growth. China is the world’s top copper user, accounting for around 45 percent of refined copper demand.

But Wu Yuneng, vice-president of Jiangxi Copper Co Ltd , China’s top producer of the metal, said the worries were overblown and that copper demand would grow at a healthy clip next year.

“I think people are overly worried about China and its economic growth. The double-digit growth rate in the past 10 years is not sustainable, just like how one cannot run a marathon by sprinting throughout,” he said.

“I’m very confident about China’s economy for next year and see copper demand growing at about 7 percent.”

In Other News:

Cuts in China
The People’s Bank of China cut its benchmark one-year deposit rate by 25 basis points to 2.75% on Friday and trimmed its one-year lending rate by 40 basis points to 5.6% amidst concerns that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making.

Friday’s surprise cut in rates, the first in more than two years, reflects a change of course by Beijing and the central bank, which had persisted with modest stimulus measures before finally deciding last week that a bold monetary policy step was required to stabilize the world’s second-largest economy.

“Top leaders have changed their views,” said a senior economist at a government think-tank involved in internal policy discussions.

The economist, who declined to be named, said the People’s Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry’s reserve requirement ratio (RRR), which effectively restricts the amount of capital available to fund loans.

“Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely,” the think-tank’s economist said.

Cleaning Up Copper
Freeport McMoran Inc.’s Javier Targhetta also told conference attendees in Shanghai that the copper industry should focus on “getting rid of arsenic in real terms” rather than relying on blending as a short-term measure to mitigate the effects of new high-arsenic supply in the concentrates market.

The arsenic issue has become a major and increasing point of focus in the copper market over the past couple of years, as the arrival of new high-arsenic mine supply has created a two-tier market for clean and complex copper concentrates cargoes.

BHP Ramps Up Copper Drive on “Strong” Outlook
BHP Billiton has forecast a significant global copper supply deficit by 2018, saying longer-term growth projects at South Australia’s Olympic Dam and in Chile mean the company is “well positioned” to respond to structural changes.

Speaking at an investor day, BHP’s chief financial officer Peter Beaven said industry-wide copper production would increasingly be challenged by structural factors including a decline in grade, with the availability of power and water also likely to be a constraint in several countries.

Beaven also said copper is better placed to withstand changes in emerging economies such as China.

“Emerging economies are transitioning to consumption-led growth and that’s not a problem for copper because copper is used in the build part of growth as well as in the consumption part,” he said.

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