Thursday, March 8, 2012

Copper Market Remains Tight

Dr. Copper continues to attract plenty of debate regarding the future. The bulls point to the fast declining inventories at the LME long followed as the leading inventory indicator. The bears will point to the fast increasing supplies at the Shanghai Futures Exchange warehouses suggesting that China demand is slowing.

It's very possible that both opinions are correct and the truth is somewhere in the middle. Codelco, the leading copper producer in the world, shared some interesting thoughts on the copper market as it revealed the plans for spending a record $4.3B this year on increasing output.

So why is the largest copper producer spending to increase production if the worlds largest copper user is slowing down? Naturally because the company sees a tight market partially due to strong demand and also due to weak supply.

Codelco expects copper production from its mines to actually decline this year. Highlighting the ultimate problem with any bears of copper. If demand just shows fractional increases, the major producers are having a very difficult time keeping up as old mines continuously run into weaker ore grades. The good sections have already been mined.

Another major issue is the political one highlighted by the Indonesia's government plan that mines be required to have 51% domestic ownership. This means that any new copper mines will be significantly delayed or cutback as potential investors analyze the situation. It also calls into question the massive Grasberg mine operated by Freeport McMoran (FCX). Freeport claims that the existing contract will be honored, but that doesn't mean Freeport will put effort into increasing production knowing the questionable future in the country.

Another major positive continuously overlooked by the market is the number 2 user of copper has finally turned the corner. Increasing demand in the US could tighten a market not use to growing demand in the US combined with huge demand from China. Also surprising was to hear that Europe has seen a pickup in demand. While not long enough to be considered a trend, it would further place pressure on the market.

Freeport remains the best vehicle to benefit from a strong copper market. To us, the key remains the US market. Doesn't appear logical that China will see additional growth in demand, but even the forecasted 4-5% growth in demand would be immense pressure on this market.


Codelco details via Rueters report:


  • The world's top copper producer, Chile's Codelco, said on Tuesday it will invest a record of more than $4.3 billion this year and sees output dipping slightly in what it forecasts will remain a tight market, with firm demand from No. 1consumer China.
  • The state miner expects its output to dip to 1.7 million tonnes in 2012 from 1.735 million last year, before picking up sharply as of next year as new projects come on line.
  • Codelco has several key projects planned as part of a long-term investment valued at about $17 billion to boost output to more than 2.1 million tonnes by 2020 and counteract dwindling ore grades.
  • Among crucial projects are the $3.8 billion transformation of century-old Chuquicamata, the world's No. 1 open-pit mine, into an underground operation and the expansion of Andina, aimed at doubling that mine's output to around 600,000tonnes per year.
  • Hernandez said European demand had picked up in recent weeks and stronger-than-expected economic data in the United States suggested that market would help compensate for a potential sag in Chinese demand.
Disclosure: Long FCX. Please review the disclaimer page for more details.

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