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International copper producers and investors at last week’s CRU/CESCO Copper Conference in Chile say they envision a very bright future for copper.

Author: Dorothy Kosich
Posted: Thursday , 17 Apr 2008

With near-record copper prices, boundless optimism surrounding China and supply concerns serving as a backdrop, international copper producers and investors think "that robust internal Chinese consumption and aggressive infrastructure spending should keep demand very strong in 2008 and 2009."

BMO Capital Markets Global Commodity Strategist Bart Melek said Wednesday that attendees at the recent CRU/Cesco 7th World Copper Conference week in Santiago feel that the U.S. recession is only expected to have a limited negative impact on global copper demand growth and prices. However, high costs are squeezing copper margins.

"What was somewhat surprising, however, is the extent of optimism flowing through the industry at a time when the U.S. may be entering a prolonged period of below-potential growth," Melek noted. "Even an IMF prediction that the credit crisis could generate $1 trillion worth of losses and a global growth downgrade did not dampen the upbeat mood in Santiago."

The conference's other major theme was mining industry mergers, according to Melek. "M&A activity will most likely be driven by the astronomical costs associated with developing reserves into producing concerns and very tight credit markets. Only well-capitalized players with a proven track record are likely to convince banks and investors to risk billions of dollars on a mining venture."

Although small to medium-sized miners and explorers are the easiest targets for larger company companies, Melek suggests that "the acquisition wave likely won't stop there. Large players will likely use acquisitions of other majors to build capacity, as buying existing reserves is the easier way to go. In addition, many producers believe that markets are under-pricing mining equities, making mergers attractive."

Melek also noted that China optimism, supply concerns and a weak U.S. dollar dominated the conference agenda. "Supply issues ranging from sulphuric acid to labor shortages, and investment flows into commodities were all cited as reasons for company's stellar performance."

China and the developing world "are seen to be driving short- and long-term demand growth, sky-high labour, energy, sulfuric acid and surging capex costs and geopolitical risk were cited as reasons for modest long- and short-term supply increases. The high cost inputs was also repeatedly mentioned as very supportive of copper prices," Melek said.

"According to industry experts, supply of sulphuric acid, a key ingredient in SX/EW copper production, will remain scarce and very expensive for years to come," Melek noted. "Latin America in particular will suffer from the shortfall because of strong regional demand for copper and fertilizers. At the same time, skilled labour is hard to secure and it is getting increasingly expensive. Salaries for geology undergraduates in Canada, for example, jumped to an average of about Cdn$90,000 from just over Cdn$60,000 in 2004."

Melek estimated it now costs an average of $10,600 ($4.81/lb) to develop a tonne of annual copper production. The capex is significantly higher for the upper end of cost distribution, which implies a higher copper price for the upcoming decade, according to the CRU.

Meanwhile, "the rise of resource nationalism and the associated increases in government revenue streams, more stringent environmental regulatory regimes and the credit crunch were all touted as factors set to keep supply growing slowly. The view that robust demand may accompany slow supply growth due to the rising costs given above lends solid support to the argument that copper prices will trend at very high historic levels for the foreseeable future," Melek advised."