The copper sector, like nearly all metals, has been tarnished by the slow downturn in economic activity over the last fourteen months. Lower demand in key consuming nations like China and the EU have resulted in big cutbacks in production. But copper is one of the most versatile of metals and still has luster for many industries dependent on the metal. Red Metal Blue Planet It’s said that all that glitters is not gold. They are right, as a great deal that shines in the commodity markets is copper. Or at least it used to. Copper is one of the oldest and most globally traded commodities and while the value has somewhat been tarnished by the worldwide drop in commodity prices, the prospects for a rebound are high, although less certain is where and when. From a production standpoint there are only a handful of really big players. In South America, Chile and Peru (see chart on page 18) are dominant while in North America, the United States, Canada and Mexico are also major producers, along with Russia, China, Zambia and the Congo. Not surprisingly the consuming markets for copper also tilt towards the developed nations with the caveat that there is a high level of recycling of copper products that impact demand. Tarnished Market & Projections According to the USGS, mine production of copper in 2015 decreased by 8% to about 1.25 million tons, and was valued at about $7.6 billion. The production is concentrated in a very few states: Arizona, New Mexico, Utah, Nevada, Montana, and Michigan. In descending order of production, they accounted for more than 99% of domestic mine production. In global terms, Chile with 5,750 million tons of production far and away was the largest producer with China at 1,750 million tons and Peru at 1,600 million tons following suit. For the last fourteen months copper prices have been sliding downward (along with nearly all other major commodities) losing around 26% for calendar year 2015. This is nothing new to copper as a commodity. Since the peak back in 2011, the price of (high grade) copper has clunked downward like a slinky on stairs to a little over $2 per pound from more than twice that tally. As for many commodities, China is to blame. The drop in China’s GDP growth (probably a fraction less than 7%) has directly related to the loss in demand for base commodities like copper. Without China’s industrial demand the price of copper is difficult to support. The funny thing about copper is that it hasn’t dropped as far as analysts would expect – perhaps because of the metal’s versatility. USGS says global copper production inched up 200,000 tonnes for a total of 18.7 million tonnes in 2015. This happened despite cuts from major producing “miners”. Nearly all the major producing nations saw production slip in 2015, when compared to 2014 (see chart on page 18) and the trend will continue. Many mining conglomerates have either scaled back or outright shut down copper mines, as the metal prices are too low to support operations. The copper market also is being realigned as M&A (merger and acquisition) activity shakes up the mine ownership. The final factor in dampened demand is substitution. For example, the car radiator for decades was a copper part but in recent years aluminum has largely taken this market. The trend started in Western Europe and has moved forward both with U.S. and Japanese automakers. Worldwide, on the basis of weight, 52% of radiator material consumed for original equipment is aluminum. There also has been substitution in other markets such as piping where plastics have taken hold. Still copper’s importance in other growing industries like electronics is fueling a consistent demand for the metal. This shift has a two-fold impact: One, lessened demand in traditional industries and two, a “ scrap industry” in recycling copper from existing items and repurposing the copper to new industries. Copper’s importance in other growing industries like electronics remains strong and is fueling a consistent demand for the metal.
Copper Production & Estimated Reserves
2014 2015 reserves
US 1360 1250 33000
Australia 970 960 888000
Canada 696 695 11000
Chile 5750 5700 210000
China 1760 1750 30000
Congo 1030 990 20000
Mexico 515 550 46000
Peru 1380 1600 82000
Russia 742 740 30000
Zambia 708 600 20000
world total 18500 18700 720000
Source: USGS
The Pits Although there is a great deal of consternation over the “current” market for copper – $2 a pound – the reduction by moth balling and outright closure of high priced mine operations is narrowing the gap between production and consumption. One observation shared by many of the big players is the “playing” out of cheaper open pit mines. Many of these mines are now producing lower grades. As a result the business is moving underground to seek out higher grades of copper ore. These mines are more expensive to build and operate but produce higher grades of ore. For one, Peru is counting on the upward swing in prices as are forecasting a 5.4% gain in 2016 and a 7.9% increase in 2017 of copper ore production - placing the nation in the number two slot for production behind China but vying with Chile for the number one slot as an exporter. Indonesia is also trying to establish itself as a big copper exporter as market share now is important to secure for the time when the uptick occurs. Given the gap between supply and demand (compared to other commodities such as oil) increased investment and increases in copper prices could be right around the corner.