The supply and demand of Copper

The Gold Report: In October, Haywood Securities revised its prices for several commodities and predicted that copper prices should remain strong in the short term, zinc prices should strengthen over the medium term, and nickel would remain a long-term price play. Can you recap the fundamentals for each metal, starting with copper?

Stefan Ioannou: Because it is so widely used, copper is the master of the base metals. All base metal prices have been stressed this year, due to global economic uncertainty. Despite some week-to-week and month-to-month volatility, copper prices have generally stayed in the $3.25 to $3.35/pound ($3.35/lb) range.

“Concern over a near-term surplus in copper supply has kept the price from going higher.”

London Metals Exchange (LME) inventories increased over 100,000 tonnes (100 Kt), venturing north of 600 Kt. Year-to-date, net LME inventories are up 40%. Many market forecasters still predict 2013 net surpluses of over 250 Kt.

TGR: Yet the Chinese are paying a premium of $0.08 to $0.10/lb in Shanghai.

SI: LME inventories are just one piece of the pie. There also are the Shanghai inventories, in-house inventories held by producers and inventories in what are called Chinese bonded warehouses.

Data through September suggest that, while LME inventories have been up 100 Kt, the Chinese bonded warehouse inventories are down 700 to 800 Kt, implying a net deficit on the order of 600 Kt. That paints a very different picture.

Of course, we don’t know how the copper moving out of the Chinese bonded warehouses is being used. Is it going into manufactured goods, used as finance collateral, or just being stored elsewhere? Furthermore, recent data pertaining to the month of October suggests Chinese bonded warehouse inventories have since rebounded by 150 to 200 Kt.

What Investors need to look for in Copper Projects

TGR: Thank you for a very thorough summary. What three things should investors look for in a copper project?

SI: Number one, look for high grade over low grade.

TGR: And what is high grade, above 1%?

SI: It depends on the type of mine: underground or open pit. These days, I would say anything greater than 0.5% to 0.6% copper in an open-pit scenario would be relatively high grade. Anything greater than 1% would be very high grade in an open-pit scenario.

As you move underground, you want at least 2% copper.

Obviously, the presence of other byproduct credits changes the economics, but those would be my back-of-the-envelope numbers.

TGR: What else should investors look for in a copper project?

SI: Number two is jurisdiction. Politics has always played a role, but we’re seeing more issues with projects in challenging areas. In Africa, for example, governments can change overnight and the resulting changes to ownership structures usually disadvantage the mining company.

It can cause trouble when the local population isn’t happy with mining in the neighborhood. Native groups, even in stable countries like Canada, are a significant consideration. For a mining project to work, everyone has to work together.

The last thing is infrastructure. Imagine two geologically identical projects. One is next to a highway with power lines and a port facility (sounds like CUU). The other is in the middle of the northern Arctic and you have to fly in. Those two projects have significant economic differences when it comes to development. Having established infrastructure is a massive advantage.

Focus your reading on the bolded statements

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