GFMS COPPER SURVEY 2014 UPDATE ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content is prohibited without the prior written consent of Thomson Reuters. “Thomson Reuters” and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies. THE GFMS TEAM AT THOMSON REUTERS GRATEFULLY ACKNOWLEDGES THE GENEROUS SUPPORT FROM THE FOLLOWING COMPANIES FOR THIS YEAR’S GFMS COPPER SURVEY AND ITS UPDATE The Center for Copper and Mining Studies, CESCO, is an independent, non-profit organization whose mission is to contribute to the design and debate of public policies which foster the best use of the mining industry’s potential for the development of economies of mineral producing countries, with a special focus on Chile. Throughout its history, CESCO has positioned itself as a meeting point for diverse sectors that include academia, policymakers, professionals and those involved in the mining-business in order to promote ideas and discuss criteria about public policies related to economic and mining activities. KGHM is a Poland-based and globally operating mining company, with more than half a century of experience in the industry. It is the world’s leading copper and silver producer, with the offered range of products also including rhenium, lead, gold, molybdenum, nickel and platinum group metals. KGHM has a broad portfolio of producing, development and exploration projects, spanning the globe in Poland, Germany, Canada, Chile and the USA. In July 2014, the company started production in its copper, molybdenum and gold mine in Sierra Gorda, which is located in Chile’s Antofagasta region. Gfms Copper market Research and forecasts SEEK MORE CME Group, the world’s leading and most diverse derivatives marketplace, is where the world comes to manage risk. Our exchanges offer the widest range of global benchmark products across all major asset classes, as well as clearing and settlement services for exchange-traded and over-the-counter products. NYMEX and COMEX are now a part of CME Group and our Metals futures markets include full-size contracts on gold, silver, platinum, palladium, copper, steel and aluminum; and smaller size contracts for gold (E-micro 10 oz.), silver (SIL 1,000 oz.) and copper (E-mini 12,500 lbs.). With an average daily volume of more than 350,000 futures and options contracts traded, our Metals markets are the most liquid in the world for these products. Additionally, we offer clearing services of OTC London Gold spot and forwards and Iron Ore Swap futures through CME ClearPort. Dig deeper into the copper market with Gfms research and forecasts on Thomson Reuters Eikon. Use the new Gfms copper pages to quickly understand the key drivers behind market movements. see which factors drove price performance in the past, what will drive the evolution of these markets in the future, and what is happening inside these sectors today. GFMS copper pages include: • Historical supply and demand statistics • forecasts of supply, demand and price • field research reports on key markets • Exclusive analyst commentaries giving expert insight on news and market development To find out more contact us on [email protected] For more information visit thomsonreuterseikon.com © 2014 Thomson Reuters. 1006308 03/14. 1006308_v2.indd 1 14/03/2014 16:49 GFMS COPPER SURVEY 2014 UPDATE BY: Rhona O’Connell, Head of Metals Research and Forecasts Bruce Alway, Manager, Base Metals Mining Andrew Leyland, Manager, Regional Demand Ross Strachan, Manager, Regional Demand Karen Norton, Senior Analyst Duncan Chan, Senior Analyst Roger Sun, Analyst Wenyu Yao, Analyst Dante Aranda, Analyst Gregory Rodwell, Analyst Beverley Salmon, Customer Relationship Manager PUBLISHED OCTOBER 2014 BY THOMSON REUTERS The Thomson Reuters Building, 30 South Colonnade London, E14 5EP, UK E-mail: [email protected] Web: https://thomsonreuterseikon.com/markets/metal-trading/ ISBN: 978-0-9928402-6-6 (Print) ISBN: 978-0-9928402-7-3 (Online) ISSN: 2055-1770 (Print) ISSN: 2055-1789 (Online) TABLE OF CONTENTS 1. Summary and Outlook 4 • Production 5 • Consumption 7 • Price and Market Outlook 10 2. Mine and Refined Production 11 • Mine Production 11 • Production Costs 13 • Refined Production 18 3. Consumption 21 • Mature Economies 21 • The BRICs 25 • Rest of the World 28 FOCUS BOX • Copper Miners Face Cost Challenges as Ore Grades Fall, Impurities Rise 16 © THOMSON REUTERS 2014 All content provided in this publication is owned by Thomson Reuters and/or its affiliates (the “Thomson Reuters Content”) and protected by United States and international copyright laws. Thomson Reuters retains all proprietary rights to the Thomson Reuters Content. The Thomson Reuters Content may not be reproduced, copied, manipulated, transmitted, distributed or otherwise exploited for any commercial purpose without the express written consent of Thomson Reuters. All rights are expressly reserved. TRADEMARKS “Thomson Reuters” and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies. 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FORTHCOMING PUBLICATIONS • GFMS GOLD SURVEY 2014 UPDATE 2: January 2015 • GFMS COPPER SURVEY 2015: April 2015 • GFMS GOLD SURVEY 2015 : April 2015 • WORLD SILVER SURVEY 2015: May 2015 • GFMS PLATINUM & PALLADIUM SURVEY 2015: May 2015 NOTES UNITS USED Throughout the Copper Survey, “tonne(s)” refer(s) to “metric tonne(s)”, being equal to 1,000 kilogrammes. Where conversions to and from figures quoted in pounds (lb), the following was used: 1 tonne = 2,204.62 lb • Figures throughout the report are rounded to the nearest thousand tonnes, except where further accuracy is required. • Throughout the tables, totals may not add due to independent rounding. PRICES Unless otherwise stated, US dollar prices and their equivalents refer to LME 3-month prices. TERMINOLOGY “-” Not available or not applicable. “0.0” Zero or less than 0.05. “dollar” US dollar unless otherwise stated. End use consumption definitions: “Building Construction” Building Wire; Plumbing & Heating; Air Conditioning & Commercial Refrigeration; Builders Hardware; Architectural. “Electrical & Electronic Power Utilities; Telecommunications; Business Electronics; Lighting & Products” Wiring Devices. “Transportation Equipment” Automobile, Truck & Bus; Railroad; Marine; Aircraft & Aerospace. “Consumer & General Appliances; Cord Sets; Military & Commercial Ordnance; Consumer Electronics; Fasteners & Closures; Coinage; Utensils & Cutlery; Miscellaneous. Products” “Industrial Machinery In-Plant Equipment; Industrial Valves & Fittings; Non-Electrical Instruments; & Equipment” Off-Road Vehicles; Heat Exchangers. ACKNOWLEDGEMENTS In addition to relevant publicly available data and data from key industry bodies, many of the estimates shown in this Copper Survey as well as our analysis of production, consumption and investor activity, have been based on visits to key markets and discussions with local producers, consumers, traders and other institutions active in copper. We are grateful to all of them. GFMS COPPER SURVEY 2014 UPDATE SUMMARY AND OUTLOOK 1. SUMMARY AND OUTLOOK The copper market continues to fight some strong downward pressure from increased supply, a weaker demand growth outlook and fears of metal previously tied up in financing coming back to the market. Marginal production cost levels around $6,200/tonne are also getting closer to the price, with the cost-toprice comparison not including a return on capital invested. LME 3-month prices have traded in a range of $6,321-$7,460/tonne between the beginning of the year and early October with a slow downward trajectory punctuated by temporary market shocks, including Chinese financing probes and State Reserves Bureau purchases. More lately a series of weaker economic data, falling Chinese refined copper imports and a stronger dollar have also weighed on prices. been a feature for many years, it could cause a temporary slowdown in offtake. Government policy appears centred around micro-stimulus and shoring up stateowned enterprises rather than the previous broad-based injections of liquidity into the economy. In the Chinese market consumption is still expected to increase by 490,000 tonnes in 2014. This would represent considerable growth considering the State Grid Corporation of China’s under spend so far this year and a weakening in housing starts. The main risk to the copper sector appears to come from a hardening in the government’s attitude towards credit in China. While this prudence will ultimately be beneficial in reducing the investment bubbles and over-heated sectors that have On the supply side a much anticipated, albeit delayed, increase in new copper mine output, a resumption of concentrate shipments from Grasberg and a strong performance from existing producers has seen a surplus grow in the concentrate market. This kept mid-year contract treatment and refining charges at $91/tonne and 9.1 cents/lb respectively and we are expecting an increase to over $100/tonne and 10.0 cents/lb to be announced for the first half of 2015. Global demand growth is forecast to grow by 859,000 tonnes in 2014, with significant contributions coming from the EU-28 at 114,000 tonnes and the US at 58,000 tonnes. This is in contrast with the BRIC economies, excluding China, who between them only total forecast growth of 19,500 tonnes. The recovery in mature markets is also unlikely to be sustained, in our view, as Europe weakens and mature economy consumption gets closer to pre-crisis levels. WORLD COPPER SUPPLY AND DEMAND Change Change Change (000 tonnes) 20132014Fy-o-y13.H113.H214.H1y-o-y 14.H2Fy-o-y Refined Production Primary from Concentrate 13,091 13,933 6.4% 6,359 6,732 6,745 6.1% 7,188 6.9% Primary SX-EW 3,796 3,885 2.3% 1,888 1,908 1,915 1.4% 1,970 3.0% Secondary 3,845 3,993 3.8% 1,863 1,982 1,928 3.5% 2,065 4.2% Total Refined Production 20,732 21,811 5.2% 10,110 10,622 10,588 4.7% 11,223 5.7% Refined Consumption Construction6,3426,563 3.5%3,0923,250 3,231 4.5% 3,332 2.5% Electrical and Electronic Products 7,996 8,303 3.8% 3,912 4,084 4,029 3.0% 4,274 Transportation Equipment 2,353 2,497 6.1% 1,147 1,206 1,223 6.6% 1,274 5.7% Consumer and General Products 2,027 2,138 5.4% 965 1,063 1,027 6.5% 1,111 4.5% Industrial Machinery and Equipment 1,951 2,027 3.9% 953 998 1,005 5.5% 1,022 2.4% 4.2% 10,068 10,601 10,515 4.4% 11,013 3.9% Total Refined Consumption 20,669 21,528 4.6% Surplus/(Deficit) 64 283345% 42 21 73 73% 210897% Exchange Stock Change (85) (241) 185% 320 (404) (255) n/a 14 n/a Implied Off-Exchange Stock Change 149 525 253% (277) 426 328 n/a 196 -54% LME 3-Month Price ($/tonne) 7,346 6,810 -7.3% 7,572 7,128 6,885 -9.1% 6,735 -5.5% LME Cash Price ($/tonne) 7,322 6,835 -6.7% 7,541 7,113 6,916 -8.3% 6,755 -5.0% Source: GFMS, Thomson Reuters; ICSG, LME. Note that totals may not add due to independent rounding. 4 GFMS COPPER SURVEY 2014 UPDATE COPPER SURPLUS/DEFICIT & PRICES COPPER PRICE AND 50 DAY MOVING AVERAGE 9000 250 50-Day Moving Average Surplus 150 10000 9000 $/tonne 8000 7500 7000 8000 50 0 7000 -50 -100 6000 -150 -200 6500 6000 Jan-12 Jul-12 Jul-13 Jan-13 Source: GFMS, Thomson Reuters; LME 5000 Deficit -250 4000 -300 Jan-14 Jul-14 In the refined market we have also seen a surplus in the first half of the year of 73,000 tonnes, which is forecast to grow in the second half to 210,000 tonnes. This should halt the marked decline in reported stocks witnessed since Q1 2014 and return the market to more comfortable stock-cover conditions, hopefully also with a greater degree of confidence in the integrity of Chinese inventory. Premia for physically delivered refined material have already been falling in major markets and this is a trend that we expect to continue. In terms of risk to the outlook, unless Chinese offtake and the global economy surprise on the upside, which seems unlikely given current economic policies in China and the most recent slowdown in Europe, there appear to be few demand-side shocks that could push the market into deficit over the coming year. SUMMARY AND OUTLOOK Tonnes (thousands) 100 Half-year Average Prices (US$/tonne) Copper Price 8500 F Price 200 H1-10 H1-11 H1-12 H1-13 H1-14 Source: GFMS, Thomson Reuters PRODUCTION ——Copper mine production will regain some of the momentum lost in the first half of 2014 during the second half, even though the growth rate may not look that impressive due to the surge in output witnessed in the final quarter of last year. ——Concentrate stocks that accumulated last year have been more than sufficient to fuel stronger growth in refined output. While rising treatment and refining charges will encourage higher processing of concentrates. With this in mind, the direction of the copper market will increasingly be driven by supply-side events, in our view. As new production capacity fights against lower prices, ultimately, the seeds will be sown for the next bull market. Global mine production posted growth of 5% year-onyear in the first half as performances of some sizeable mines, such as Collahuasi in Chile and Bingham Canyon in the US, compared favourably with year-ago levels, and as new mines and expansions ramped up. A number of those ramp-ups encountered delays, however, which meant that output still fell considerably short of its potential. Other factors that pegged back growth included technical problems, and the knock-on effect of the suspension of concentrate exports from Indonesia. TOTAL EXCHANGE STOCKS EXCHANGE STOCKS AND PRICES 1000 LME COMEX Tonnes (thousands) 400 200 0 Jan-12 Copper Price 800 600 Jul-12 Jan-13 Jul-13 Jan-14 Source: GFMS, Thomson Reuters; LME, COMEX, SHFE Jul-14 10000 9000 600 8000 400 7000 200 6000 0 LME Daily Price US$/tonne Tonnes (thousands) 800 SHFE COMEX LME 1000 SHFE 5000 H1-10 H1-11 H1-12 H1-13 H1-14 Source: GFMS, Thomson Reuters; LME, COMEX, SHFE 5 In terms of miners’ costs, we estimate cash costs in the first half at $1.74/lb ($3,842/tonne), or 3% lower than the corresponding period in 2013. Including depreciation, production costs came in at $2.19/lb ($4,825/tonne), a more modest 1% improvement year-on-year. As for margins, the position was largely unchanged, with the drop in the average copper price offset by lower unit costs, proving for a cash operating margin of 45%, compared to 44% in 2013. Assessing quarterly trends, unit costs in the second quarter were up by 10% from the recent low of Q4 2013; a period which benefitted from a sharp jump in average ore grades. That said, we don’t expect this to signal a new trend in cost escalation. In the near term, cost cutting efforts and low cost new mines ramping up should keep costs relatively well contained. Returning to supply prospects, in the second half of 2014 we are looking for year-on-year growth of around 2%. It is only in the fourth quarter that we expect mine output in volume terms to regain and surpass the aforementioned impressive levels achieved during the final quarter of 2013 as ramp-ups of new mines run more smoothly and others start up. While still making allowance for the potential for some further unforeseen disruptions in the remainder of the year, we expect full year production to reach 18.3 million tonnes, up about 2.5% from 2013. On the subject of disruptions, it has to be said that labour-related stoppages featured very little in the first half of the year and into the second half. Furthermore, notwithstanding the recent 24-hour warning strike at the Escondida mine in Chile, the indications are that any that may erupt in coming months will not prevent the copper market’s transition to substantial surplus. Taking a look at upcoming contract expiries as an indicator of future potential flashpoints, our records show there are very few to track through the rest of the year. Those we currently understand yet to be negotiated are at Codelco’s Gaby facility at the end of October and at Glencore’s Lomas Bayas and Freeport McMoRan’s Chino mining operations; both at the end of November. These three operations produced a combined total of just over 300,000 tonnes last year. While mine production this year has fallen short of expectations the concentrate stocks that accumulated, especially in China, during last year’s surge, and since then have been more than sufficient to fuel stronger growth in refined output this year. Meanwhile growth from SX-EW operations has been rather constrained and tight scrap supply has pegged back secondary production levels in some countries. Production of copper from secondary sources has still risen overall so far this year, but supplies of the material have been relatively tight. Scrap availability appears to have improved of late, sources recently indicated, albeit slightly. Top producer China will see growth in secondary output this year, despite lower inflows of feed from overseas. The country’s imports of copper scrap fell 12% year-on-year in the first eight months on a gross weight basis, despite a relaxation earlier in the year in customs checks on scrap arrivals. Rising treatment and refining charges (TC/RCs), meanwhile, have helped to encourage higher processing of concentrates and this is a trend which looks set to continue. Closely watched spot treatment charges for clean concentrate in China were recently quoted at around $119/tonne and 11.9 cents/lb, up one-third from July before the suspension of concentrate exports from Indonesia was lifted. Further increases in processing fees seem inevitable as mine supply continues to grow apace. It has come as no surprise to learn therefore that Pan Pacific, Japan’s biggest copper smelter is seeking a near-double digit increase in annual benchmark terms for 2015 from the $92/tonne and 9.2 cents/lb agreed for this year. Other players in Japan and China are expected to adopt a similar stance and there are indications that smelters may push for even higher terms. As custom smelters look to benefit from this greater revenue potential, and as processing capacity continues to expand in China, we estimate that world refined output will remain on a strong upwards path in the medium term. In the first half of 2014, metal output was about 5% higher than the same period last year, and acceleration to close to a 6% pace in the second half is expected to combine to give full year production in 2014 of 21.811 million tonnes. ANNUAL INCREASES IN MINE AND REFINED PRODUCTION 8 Mined Annual Production Growth (%) SUMMARY AND OUTLOOK GFMS COPPER SURVEY 2014 UPDATE 6 Refined 4 2 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 (F) Source: GFMS, Thomson Reuters 6 GFMS COPPER SURVEY 2014 UPDATE CONSUMPTION ——Global refined copper consumption rose by over In the first six months of 2014 global copper demand has grown at an almost identical pace to the 2013 average, but at a faster rate than a year earlier. This healthy increase of nearly 500,000 tonnes was split more diversely across the globe than a year ago. This was chiefly due to two counteracting features, as the deceleration in Chinese growth was offset by the improvement in the performance of the mature economies. Consequently, the increase in Chinese demand has accounted for 53% of global growth down from 92%. Having returned to growth in the second half of 2013, European Union copper consumption in the first half of 2014 increased at almost 6%, its fastest rate since late 2010. Encouragingly, this growth was widespread across the region with some of the former laggards, such as COPPER CONSUMPTION BY REGION (VOLUME CHANGE Y-O-Y) 500 In a similar vein, there was a sharp increase in US copper demand in the first half bolstered by auto sales hitting their highest level since 2006. Another source of demand growth was from the residential property sector, which after a sluggish start to the year, due to abnormally bad weather, soon accelerated. As a result, consumption from the building construction sector was up more than 5% for the first half of the year. Japanese demand was also up noticeably for the first six months as a whole. However, in contrast to the US, growth was stronger in the first quarter of 2014 as activity was brought forward ahead of an increase in the sales tax at the start of April. In China, demand has continued to grow at a healthy rate, just shy of 6% year-on-year. Consequently, Chinese consumption was up some 240,000 tonnes from a year earlier, despite weakness in demand from the electrical sector due to less tenders from the State Grid. The still robust growth rate was aided by a lack of scrap, strong growth from the transportation sector and for air conditioners. It is worth noting that, due partly to the output of air conditioners and the fact that copper demand lags housing starts, building construction demand in China was still up almost 6%. Meanwhile, some other key emerging markets saw demand actually fall year-on-year with declines registered in both Russia and Brazil. Central to the former’s woes was geopolitical tension, while the latter was hit by a struggling economy and the World Cup. COPPER CONSUMPTION BY END-USE (VOLUME CHANGE Y-O-Y) 200 H1-13 H1-14 400 H1-13 180 H1-14 160 Tonnes (thousands) Tonnes (thousands) 140 300 200 100 120 100 80 60 40 20 0 0 -100 China BRICS (ex. China) Source: GFMS, Thomson Reuters Mature Others Global -20 Building Electrical Transport Consumer Industrial Source: GFMS, Thomson Reuters 7 SUMMARY AND OUTLOOK 4% year-on-year in the first half of 2014 to just over 10.5 million tonnes. This was aided by the tightness of the scrap market over that period which continued to bolster the requirement for the refined metal. ——All major sectors of global copper demand grew appreciably in the first half of the year, and as shown in the chart below contributed meaningfully to the additional demand, in contrast to a year earlier when the industrial machinery sector dropped back. ——In the first six months of the year, transportation demand was the fastest growing sector with consumption up almost 7% compared to a year earlier. Central to the rapid increase was a strong upturn in auto sales, especially in the United States and Europe and continued rapid growth in the Chinese automotive sector. Spain and Italy, among the fastest growing countries. This upturn was felt across all sectors and was led by a 9% rise in offtake from the transportation sector, which benefitted from a strong recovery in auto sales. It also gained support from the rising exports to meet demand for wiring harnesses in North Africa. 8 US$/tonne Mar Source: GFMS, Thomson Reuters Feb Apr May Worries mount over Chinese and US growth; Eurozone debt issues escalate. Sequester triggers US spending cuts Jun Jul Aug Fed says it could start tapering by end-2013 Sep Oct Nov Dec Jan-14 Typhoon damage causes closure of Pasar Feb Mar Apr ECB cuts deposit rates to -0.1% May Jun Jul China’s Qingdao port metal financing fraud probe Heavy sell-off triggered by concerns over the health of Chinese economy and first domestic bond default US Fed reduces bond buying by $10bn per month HSBC flash China PMI record its first contraction China unveil mini-stimulus package Chaori Solar as first domestic bond default Indonesia announces export ban on raw ore Nearby spreads tighten once more as exchange stocks continue relentless decline US government shuts down temporarily on budget impasse Brief strikes at some Chilean operations Spot availability tightens, cash-to-threes briefly moves into backwardation Concerns over potential US tapering, weak China data Grasberg down following tunnel collapse Indian/Zambian smelters restart Failure of open pit wall at Bingham Canyon; labour unrest in Chile; unplanned smelter closures in India/Zambia Industry guidance reaffirms outlook for strong production growth Data show Chinese GDP +7.9% in Q4 2012 vs +7.4% in Q3. Jan-13 6000 6500 7000 7500 8000 8500 Aug Sep ECB cuts rates and triggers US dollar rally SUMMARY AND OUTLOOK GFMS COPPER SURVEY 2014 UPDATE LME COPPER PRICE EVENTS GFMS COPPER SURVEY 2014 UPDATE TECHNICAL ANALYSIS Simple Moving Average, 365, Daily 9000 100.0% 8,765 2 8500 2 SUMMARY AND OUTLOOK 8000 US$/tonne 61.8% 7500 7,831 4 4 50.0% 7,543 1 b 38.2% 7,254 7000 1 1 3 6500 5 a 00.0% 6,321 3 6000 5 90 US Dollar Index, Daily 88 86 61.8% 84 82 50.0% 81.83 80 38.2% 79.35 78 03-Jan-12 9000 84.31 10-Jul-12 26-Jan-13 14-Aug-13 02-Mar-14 18-Sep-14 LME 3M Copper, Weekly T 8500 US$/tonne 8000 7500 7000 6500 A M J Q2 2013 J A S Q3 2013 O N D Q4 2013 J F M Q1 2014 500 A M J Q2 2014 J A S Q3 2014 O N D Q4 2014 J F Q1 2015 Oscillator, Weekly 400 300 > 0, Overbought 200 100 0 10 -100 -200 < 0, Oversold -300 -400 03-Jan-12 10-Jul-12 26-Jan-13 14-Aug-13 02-Mar-14 18-Sep-14 Source: GFMS, Thomson Reuters 9 GFMS COPPER SURVEY 2014 UPDATE SUMMARY AND OUTLOOK PRICE & MARKET OUTLOOK Headwinds are picking up for copper prices. China’s property sector is slowing, growth in emerging markets remains weak and mine supply continues an upward trend. The resurgent dollar adds further resistance to any price recovery. There could however, be some significant ‘stops’ to a major down leg in the price. Recall that sentiment received a much needed boost earlier in the year when it was reported that the State Reserve Bureau bought at least 200,000 tonnes of refined metal over March and April, around the year-to-date low copper price of $6,321/tonne. If prices approach these lows again, further strategic buying cannot be ruled out. Price risks to the downside certainly remain; the technical indicators for the metal present a particularly bleak picture (as shown on Page 9). At the start of October the metal broke a key level of support (the sixth wave of the eight wave cycle, at $6,621/tonne), setting the scene for a move lower to $6,321/tonne. Furthermore, if the dollar rally continues on trend, copper can be expected to take another step down to $6,000/tonne. The main controls on price are expected to be the 365-day moving average and the dollar index. The latter, currently at 85, is expected to continue to strengthen and breach the 2010 high of 89. Short dated indicators support our broader analysis. The weekly chart dates the start of the recent sell-off on 12th September, while the ongoing divergence between copper and the oscillators supports the view that first, the metal is not yet oversold, and second, that the downtrend towards the $6,321/tonne support level is still in sight. The gap down in prices remains significant, and without a narrowing here, a correction in the price looks unlikely. Turning back to the fundamentals, and while we take some comfort in the improving picture in demand in the US, the slowing property market in China remains a real concern. Copper is a late stage material in the construction process, so there is a lag in metal demand in the ‘bricks and mortar’ building cycle. As this sector slows, this will feed into a more meaningful drag on copper demand in the coming months, in our view. On top of the wobbles evident in the housing market, the outlook in other sectors remains gloomy. For example, our research suggests that stocks of air-conditioners are well above usual levels. With high stock levels, seasonal weakness in the second half, and the softer economic outlook, we expect demand in the coming months to scale back significantly. There are some bright spots. Vehicle demand growth, for instance, continues to remain above trend and electric vehicle demand is growing fast, 10 albeit from a small base. In addition investment in power infrastructure is under plan, in part due to investigation of one of the Chinese state power companies, which suggests some pent up growth could yet filter through. Overall, however, the tone is bearish, and coupled with the expected increase in mine supply and refined copper output we see the market moving into clear surplus, pressuring prices to move lower. Talking to mine supply in more detail, the strong growth trend, in our view, is set to continue. Looking towards the next six months, we calculate more than a million tonnes of new copper capacity, or around 6% of global mine production, coming on stream. Meanwhile, forced supply cuts from existing operations look unlikely. Based on our estimates, the 90% percentile of net cash unit costs at Q2 2014 is around $5,300/tonne or $2.40/lb. Adding in depreciation takes the total production costs figure to around $6,200/tonne, or around $2.80/lb. Moreover, the barriers to closing a mine are relatively high. For instance, the owner’s view on the outlook of longer term copper prices, the potential damage to relations with government, the high cost associated with retrenchment of labour and accelerating any environmental liabilities. With growing concentrate supply and the incentive of high and rising processing fees we expect refined copper production to keep pace with mine supply, on a strong upwards course. Chinese smelters should lead the way with additions to refinery capacity in the country this year expected to boost capacity by around 800,000 tonnes. Official customs data shows China imported 7.3 million tonnes of ores and concentrate in the first eight months of 2014, an 18% increase year-on-year. This, despite the fact that some Chinese smelters deferred spot concentrate purchases in expectation that Indonesia would resume concentrate exports in the third quarter after halting shipments in January (Freeport actually announced the resumption of exports late July). The combination of the ramp-up in new mine supply and the resumption of shipments from Grasberg and, recently, from Batu Hijau, leaves the concentrate market in decent surplus. In response spot treatment charges have risen sharply, which will encourage smelters to hit full year production targets. The risk of processing bottlenecks related to smelter shutdowns or the need to blend dirty concentrates (related to high arsenic levels in new mines such as Hales and Toromocho), is an issue to keep in mind, but we do not expect this to be a significant headwind in the short term. Overall, for Q4 2014 we forecast an average LME 3-month price of $6,500/tonne, declining to $6,200/tonne for 2015. GFMS COPPER SURVEY 2014 UPDATE WORLD MINE PRODUCTION 2. MINE AND REFINED PRODUCTION 25000 Africa Europe Oceania • World mine production fell short of expectations in the first half of 2014, but still managed to post a year-onyear growth rate of 5%. For the year as a whole, we expect growth of 2.3% in light of the comparison with the sharp growth seen in the final quarter of last year, when output was boosted by a jump in average ore grades. Tonnes (thousands) 20000 15000 Asia 10000 Americas 5000 0 • • We estimate miners’ cash costs in the six months to June at $1.74/lb ($3,842/tonne), or 3% lower year-on-year. Unit costs in the second quarter were up by 10% from the recent low of the fourth quarter of 2013. However, we do not believe this heralds a new trend in cost escalation. 2006 2007 2008 2009 2010 2011 2012 2013 2014 (F) Source: GFMS, Thomson Reuters SX-EW operations was considerably more subdued. The favourable overall year-on-year comparison was due largely to start ups and continued ramp ups of some new mines in Asia, South America and Africa, as well as improved productivity at several significant, well-established operations. Higher ore grades, along with recoveries in productivity after earlier accidents or technical problems also played a role. MINE PRODUCTION Nevertheless, the period was not without unforeseen disruptions. Teething problems at new, or relatively new, mines and the suspension of concentrate exports from Indonesia conspired to prevent global production from reaching its full potential. It is also worth noting that mine output actually fell over 3% in the first half of this year from the second half of 2013. This did, however, represent an improvement from the first quarter 2014 performance, when production dropped by around 6% from the preceding three month period. Global copper mine output in the first half of 2014 rose by 5% from the same period last year to fall just shy of 9.0 million tonnes. Within this, copper-in-concentrate production rose by almost 6%, while output growth from Aside from the Indonesia export suspension, which pegged back supply in the first half and into the third quarter, output also fell 3% year-on-year in January to June at Chile’s Escondida, the world’s biggest copper • Boosted by ample and rising concentrate supplies, world refined copper production (mainly primary metal from concentrate) gathered momentum in the first six months of 2014, having risen at a comparatively slower pace in 2013. Furthermore, high and rising treatment and refining charges look set to underpin further strong growth in metal output in the medium term. MINE PRODUCTION BY REGION (000 tonnes) 2011 2012 2013 14.H1 14.H2 2014F Americas 8,948 9,276 9,847 4,998 5,264 10,262 Asia 3,033 3,091 3,361 1,636 1,750 3,386 Europe 1,658 1,736 1,783 900 892 1,792 Africa 1,295 1,417 1,809 912 1,026 1,938 Oceania Total Year-on-year % change Total minus disruption allowance 1,084 1,048 1,078 549 539 1,088 16,017 16,568 17,877 8,995 9,471 18,466 0.3% 3.4% 7.9% 5.0% 1.7% 3.2% 18,293 Year-on-year % change 2.3% Source: GFMS, Thomson Reuters 11 MINE AND REFINED PRODUCTION Mine supply will resume its strong upwards path in late 2014 and into 2015 as some of the newer mines and expansions continue to ramp up, while new capacity also comes on stream. According to our estimates, more than 1.0 million tonnes per annum of capacity is due to start up in the next six months. GFMS COPPER SURVEY 2014 UPDATE TOP 10 COPPER MINING PRODUCERS mine. However, this was a marked improvement on the mine’s first quarter performance. Against this backdrop, it is only in the final quarter of 2014 that we expect global mine output on a quarterly basis to exceed the 4.8 million tonnes produced in the last quarter of 2013. (000 tonnes) Not surprisingly, Collahuasi and Bingham Canyon both delivered a much improved first half performance yearon-year, Collahuasi having been impacted by a 45-day shutdown of SAG mill 3, starting 21st March 2013 (which reduced plant throughput by roughly 70%), and Bingham Canyon by a pit wall failure in April 2013. As a result, first half copper output at Collahuasi increased by 88,000 tonnes or by 58%, while at Bingham Canyon, a 44,000 tonne or 50% gain was recorded. 14.H1 Change y-o-y 842 8774.1% Freeport McMoran 808 Glencore 658 74112.6% BHP Billiton 641 635 -0.9% Southern Copper 297 329 10.6% Rio Tinto 296 323 9.0% Anglo American 239 277 15.8% 807 -0.1% KGHM 272 258-5.1% Antofagasta 235 225-4.4% First Quantum 178 186 4.7% Source: GFMS, Thomson Reuters; Company Reports Lumwana, Zaldivar, and KGHM’s international operations. At Grasberg in Indonesia, a 25% drop in first half copper production was explained by the reduction in the milling rate in the second quarter to around half normal capacity. The cut was due to the delay in obtaining approvals for 2014 exports, prompting the company to move to align the mine’s concentrate production with domestic smelting operating plans. Meanwhile, new mines, Codelco’s Hales in Chile and Turquoise Hill’s Oyu Tolgoi in Mongolia, provided a combined year-on-year increase of 114,000 tonnes. Glencore’s African assets registered a 24%, or roughly 40,000 tonne increase year-on-year, mainly due to the ramp-up at Mutanda and Katanga, both in the DRC. Codelco’s Radomiro Tomic mine registered a 24%, or 48,000 tonne drop year-on-year, while Barrick Gold reported reduced output at both Lumwana and Zaldívar. The fall in copper output at Lumwana was due to a collapse of the conveyor belt, which shut down the mill and concentrate production for much of the second quarter. At Zaldívar, meanwhile, lower tonnes processed and lower recoveries impacted volumes. At KGHM’s international operations, copper production declined by 13,000 tonnes or by 24%, chiefly as a result of lower production at the Robinson mine due to lower grades. By-product volumes of gold similarly dropped and adversely impacted unit cash costs. A similar rise was reported at Freeport McMoRan’s North American copper mines. The division includes seven open-pit copper mines, with growth in the first half mostly attributable to Morenci, where commissioning of the expanded mill commenced in May 2014, and at Chino. Lastly, Codelco’s Chuquicamata mine posted a 19% or 26,000 tonne increase year-on-year in the six months to June. Partly offsetting some of the gains there were doubledigit percentage falls at Grasberg, Radomiro Tomic, COPPER’S SHARE OF TOTAL REVENUE 90 80 2 70 6. 7. 8. 9. 10. Los Pelambres FCX North America Anglo American Sur FCX South America Collahuasi 11. Escondida 4 5 7 6 8 9 10 100 11 90 80 3 2 70 60 60 50 50 40 40 30 30 1 20 20 10 10 0 0 0 10 Source: GFMS, Thomson Reuters 12 20 30 40 50 60 Cumulative Production (%) 70 80 90 100 Copper ‘s share of total revenue (%) 1. Norilsk Nickel, Russia 2. Olympic Dam 3. KGHM Polska Miedź 4. Glencore, Africa 5. EI Teniente 100 Copper ‘s share of total revenue (%) MINE AND REFINED PRODUCTION MINE-BY-MINE PERFORMANCE 13.H1 Codelco GFMS COPPER SURVEY 2014 UPDATE REVENUE BREAKDOWN FOR Q2 2014 COPPER PRODUCERS’ REVENUE SPLIT BY METAL 2.1% 3.6% 2.2% 2.7% 4% Copper 45000 36000 Copper Molybdenum Zinc and Others Gold Palladium LME Copper Price Nickel Silver 10000 9000 5% Molybdenum Palladium 27000 8000 18000 7000 9000 6000 US$/tonne US$ Millions Gold Nickel Silver Zinc and others 80% 0 Q1-13 Q3-13 Q1-14 The analysis in this section is based on a subset of global copper production and financial data. Our figures are based on just over 25 mining companies and more than 70 mining units. In some instances, a mining unit may represent multiple operating assets. This is because our data capture reflects the level of detail reported by each individual company which varies across the industry. Quarterly copper production, for instance, is almost universally reported at the mine level. Financial data, however, is often only published at a divisional or regional level. We make adjustments and estimates where necessary. For example, in some instances we adjust for provisional pricing to better estimate the implied underlying operating costs. We also use a benchmark model for the calculation of metallurgical charges, which we add back to operating costs where appropriate. The “net cash unit cost” is a direct cash cost measure, expressed in US cents per pound on paid metal sold. TONNES OF ORE PROCESSED AND GRADE The cost curves are represented as a composite of both by-product and co-product costing methods. For by-product costing, revenue from secondary metals is credited against the cost of production. Where copper is less than 65% of total revenue, we use a co-product basis, where costs are allocated to each metal on the same proportion as revenue. We exclude royalties and any other direct mineral taxes. In addition we estimate “total production cost”, which includes depreciation. Overall our sector models capture around two-thirds of global copper production (ex-China). MINE AND REFINED PRODUCTION PRODUCTION COSTS REVENUE Within our population of mines, gross copper revenue accounts for around 80% of total revenue. By-product and co-product material, in decreasing importance, include gold, nickel, molybdenum, palladium and silver, accounting for around 16%. Lastly, gross revenue from zinc, platinum, cobalt, lead, uranium, pyrite, and others accounts for the balance, or just below 4% of total revenue. Only 11 mines in our subset have by- or coPAYABLE COPPER PRODUCED AND SOLD 4500 0.80 Ore processed 4000 Recovered grade Implied (rhs) 320000 3500 160000 0.65 80000 20 Total payable copper production Total payable copper sold Year-on-Year change 15 3000 2500 10 2000 1500 year-on-year % 0.70 Pecentage 240000 Tonnes (thousands) 0.75 Tonnes (Thousands) Q3-12 Source: GFMS, Thomson Reuters; LME Source: GFMS, Thomson Reuters 400000 5000 Q1-12 5 1000 500 0 0.60 Q1-12 Q3-12 Source: GFMS, Thomson Reuters Q1-13 Q3-13 Q1-14 0 Q1-13 Q2-13 Q3-13 Source: GFMS, Thomson Reuters 0 Q4-13 Q1-14 Q2-14 13 GFMS COPPER SURVEY 2014 UPDATE NET CASH UNIT COST MARGIN VS TOTAL PRODUCTION MARGIN NET UNIT CASH COST BY REGION 70 2.5 Net cash unit cost margin 60 Total production margin Africa Asia Pacific North America South America Total Europe 2.2 1.9 40 US$/lb Margin (%) 50 30 1.6 20 1.3 10 1 0 Q3-13 In the most recent reporting period (the three months to June 2014), year-on-year revenue trends and price performance have mostly been correlated. Silver, platinum and gold revenues falling in a range of 19% to 6%, while palladium and nickel revenues posted a respective 12% and 20% increase, see chart on page 13. Outliers include copper and molybdenum. For the first three months, copper revenue was flat yearon-year, compared to a 5% fall in commodity prices, while molybdenum revenues were up 43%, versus a 21% increase in the underlying. On a longer time horizon, the pattern is repeated. From Q1 2012 to date, copper prices are 18% lower compared with a 2% decline in copper revenues. This is explained by a sharp increase in copper production over the same period, discussed below. TOP-10 PRODUCERS, H1 COST AND PRODUCTION VARIANCE UNIT CASH COSTS Notwithstanding the improvement in grades and volumes, high underlying cost inflation has meant only modest gains on a unit cost basis. World net cash unit costs, calculated using our methodology, averaged $1.75/lb in the three months to June 2014, flat compared with the previous quarter, and only 5% lower on a yearon-year basis. On a half year analysis, first half unit costs MARGINAL OPERATING CASH COST AND COPPER PRICE Y-o-Y Costs 4 Source: GFMS, Thomson Reuters 80 70 Price Premium to 90th Percentile (rhs) 60 50 3 40 2 30 20 1 Antofagasta First Quantum Anglo American Freeport McMoRan Glencore BHP Billiton Total KGHM Rio Tinto -30 Codelco -20 Southern Copper -10 90th Percentile Average Copper Price 10 0 Q1-12 Q3-12 Q1-13 Source: GFMS, Thomson Reuters 0 Q3-13 Q1-14 Percentage US$/lb 10 0 Q1-14 The growth in mine production over the last two years is a combination of increased tonnes processed and higher recovered grade. On our analysis, and for the subset of mines included in our copper cost models, and for concentrate production only, we record a 13% increase in tonnes processed, a 12% improvement in recovered grade and a 27% increase in payable copper-in-concentrate. Quarterly trends are illustrated in the pair of charts on Page 13. On average, the last six quarterly periods have delivered an 8% year-on-year growth. Y-oY Production 20 Q3-13 ORE PROCESSED & RECOVERED GRADE 5 30 14 Q1-12 Q3-12 Q1-13 Source: GFMS, Thomson Reuters Q1-14 product revenue representing more than 45% of total revenue, illustrated in the chart on page 12. Year-on-Year change (%) MINE AND REFINED PRODUCTION Q1-12 Q3-12 Q1-13 Source: GFMS, Thomson Reuters GFMS COPPER SURVEY 2014 UPDATE WORLD CASH OPERATING COSTS 3.5 1. 2. 3. 4. 5. 6. 7. 3.0 2.5 8. 9. 10. 11. 12. 13. Codelco First Quantum Antofagasta Norilsk Nickel Southern Copper KGHM Rio Tinto 3.5 Freeport McMoran Vale BHP Billiton Glencore Anglo American Kazakhmys 3.0 13 2.0 2 1 1.5 3 4 5 10 9 8 7 6 2.5 12 2.0 1.5 1.0 1.0 0.5 0.5 0 US$/lb US$/lb 11 0 0 10 20 30 Source: GFMS, Thomson Reuters 40 50 Cumulative Cost (%) 70 80 90 100 as the lowest cost copper miner with costs estimated at just below $1.40/lb, its closest peer, with costs some 6% higher, is First Quantum. This is followed by a closely packed group of copper miners with only 2 US cents separating costs estimated at Antofagasta, Norilsk Nickel and Southern Copper Corporation. The marginal operating cost of copper production, referenced by the 90th percentile on the cost curve, is illustrated on page 14. Over the last 10 quarters this has averaged $2.35/lb, between $2.02/lb to $2.63/lb. Over the same period the copper price premium to the marginal cost, has declined from 60% to around 30%. This premium is likely to narrow further as prices come under pressure from the glut of new mine supply. Among the four major diversified global miners, BHP Billiton, Glencore, Anglo American and Rio Tinto, the latter is the lowest cost copper producer with net cash unit costs estimated at just below $1.70/lb. The remaining three, all feature in the fourth quartile of our sector cost curve, with BHP Billiton unit costs estimated at just below $1.90/lb and both Glencore and Anglo American with costs a shade over $2.00/lb. Freeport McMoRan, one of the world’s biggest producers, sits in the third quartile of the cost curve, between Rio Tinto to the left and BHP Billiton to the right. Estimates of cash costs by company is shown above. On a net unit cash costs basis for Q2 2014, Codelco ranks The ten largest copper producers in our sub-sector of companies reported a combined 4% year-on-year NET CASH UNIT COSTS (US$/lb) Q1.12 Q2.12 Q3.12 Q4.12 Q1.13 Q2.13 Q3.13 Q4.13 Q1.14 Q2.14 Africa 1.71 1.75 1.95 1.94 2.03 1.78 1.47 1.55 1.92 2.05 Asia Pacific 1.33 1.63 1.81 1.98 2.05 2.09 1.87 1.49 1.93 2.18 Europe 1.15 1.19 1.19 1.27 1.38 1.61 1.63 1.87 1.50 1.41 North America 1.43 1.75 1.73 1.76 1.89 2.05 1.86 1.88 1.72 1.62 South America 1.48 1.45 1.52 1.60 1.63 1.80 1.58 1.52 1.71 1.68 World 1.44 1.51 1.59 1.67 1.73 1.85 1.64 1.59 1.74 1.75 World Total Production Costs 1.80 1.87 1.95 2.02 2.13 2.29 2.05 2.01 2.18 2.20 LME Cash Copper Price 3.57 3.50 3.59 3.60 3.24 3.21 3.24 3.19 3.08 3.22 Net Cash Unit Cost Margin 60% 57% 56% 54% 47% 42% 49% 50% 44% 46% Total Production Margin 50% 46% 46% 44% 34% 29% 37% 37% 29% 32% Source: GFMS, Thomson Reuters 15 MINE AND REFINED PRODUCTION for 2014 are only 3% lower than the same period in 2013. The regional breakdown is included in the table below. Cash margins for cash unit costs and total production costs, which include depreciation, are shown in a chart on page 14. As costs have been relatively well controlled, the main damage to margins has been the weak performance of the copper price. From the recent peak in Q1 2012, net cash unit margins are down by 13%, while total production margins have narrowed by 17%. 60 GFMS COPPER SURVEY 2014 UPDATE COPPER MINERS FACE COST CHALLENGES AS ORE GRADES FALL, IMPURITIES RISE and other deleterious elements can pose. Sources said that problems with the roaster at Ministro Hales, designed to process the high arsenic concentrate had forced the firm to This is a piece published on Eikon in early September. In cancel sales and buy raw material from the spot market. In the past decade or so, falling head grades at existing copper mid-August reports suggested that Codelco had reached a mines, along with deteriorating concentrate quality and rising deal with a trader to blend Hales’ concentrate with third-party costs for key inputs have resulted in substantial operating and material for sale in China. The Hales roaster was most recently capital cost inflation across the sector. While copper prices reported by a mine official as operating normally at close to have largely kept pace with these rising costs, miners’ margins full capacity. Ultimately, the mine should be able to produce are likely to be squeezed further as they are forced to develop 160,000 tonnes per annum (tpa) of copper. previously overlooked, technically challenging deposits in order to meet global demand. We also understand that Chinalco’s 300,000 tpa Toromocho MINE AND REFINED PRODUCTION mine in Peru, which has so far struggled to produce in line Geological considerations, along with a number of market factors with ramp up plans, has taken the route of blending material such as rising energy, fuel, labour and commodities prices have from different portions of the ore deposit to dilute arsenic already caused mining cash costs to surge by over 10% per annum content. Given the amounts of material required, this would since 2008. not constitute a final solution for the industry as a whole as impurities become a broader issue over the long term. New Geologically, the bulk of the world’s economic copper deposits technology will be needed on an industry-wide scale. are hosted within porphyry copper systems which formed on continental areas along subduction zones (for, e.g., the South Possible Solutions American Andes and the western seaboard of the United States). A number of companies are at various stages with hydro- Over the past decades, many of the higher grade portions of these metallurgical processes designed to treat material with higher deposits were exploited leaving producers with declining grade impurities. Teck Resources and Aurubis have tested (at pilot profiles at existing operations. plant scale) the CESL Cu-As process on over 100 copper-gold and copper-arsenic concentrates. These intrinsic (geological) and extrinsic (commodity prices) factors behind cost inflation have left producers with the tightest Taking a closer look at the CESL process it essentially involves simple cash margins since 2009. fixing an autoclave vessel to an existing SX-EW line and leaching sulphide concentrates at high pressure in a hot acidic Compounding the cost pressure for copper producers is the fact solution which typically results in extraction of 97-98% of the that along with declining grade profiles at existing operations, copper from concentrate. Arsenic is fixed within the same the proportion of deleterious elements such as arsenic, antimony leaching vessel to a thermodynamically and environmentally and bismuth have crept up relative to copper concentrate grades stable ferric arsenate (scorodite) within the leach residue. over the past decade. This has resulted in producers incurring The remainder of the process exploits the standard SX-EW progressively higher penalty charges and receiving lower payables methodology of producing copper cathodes, negating the from smelters. need for traditional smelting and refining. Precious metals may be recovered from the leach residue through an additional For producers to meet global demand growth, economies of scale step which involves pressure leaching in cyanide; importantly, and swelling capital expenditure budgets will be required to during this step scorodite preservation is maintained. develop progressively higher tonnage, lower grade deposits which tend to host relatively higher proportions of these deleterious With the capital expenditure outlays for equipping such plants elements. However, due to increasing environmental restrictions, estimated to be fairly sizeable, the economics of the process most smelters no longer accept concentrates with greater than lend themselves best to brownfield operations with an existing 0.5% arsenic. SX-EW plant. Arsenic Problems Perhaps a key consideration for the use of hydro-metallurgy A major topic of conversation at CESCO earlier this year and lies in the ability of this process to generate revenue certainty subsequently has related to the outlook for copper concentrate for operations while traditional smelting and refining would quality, and the methods being employed to treat so-called require them to blend and dilute their dirty concentrates. dirty concentrates. The recently commissioned Ministro Hales Mitigating this area of supply-chain risk could ensure (Codelco) and Toromocho (Chinalco) operations have served to operational cash flow certainty for these operations. By highlight the difficulties that higher concentrations of arsenic removing a large portion of traditional realisation charges, 16 GFMS COPPER SURVEY 2014 UPDATE which are subject to the vagaries of concentrate supply treat laterite ore as availability of easier to exploit sulphide (treatment and refining charges recently jumped by 15% deposits diminished. in the space of a couple of weeks after Freeport resumed shipments from Indonesia), producers should theoretically be However, development and production costs far exceeded able to lower the rate at which these asset specific free cash expectations as some companies strived to bring on plants flows are discounted. This should result in higher net present with sizeable capacity too quickly. Geological considerations values (NPVs) for hydro-metallurgical-enabled projects have also proved problematic in some instances. Some even considering the large upfront capital commitments for of those early stage PAL projects failed to see the light installing such technology. of day. Burnt by this earlier, and comparatively recent, experience, financiers no doubt will need to see proof that Mindful of Nickel these copper processes to deal with higher impurities can While contemplating the need to adapt to this brave new work on an industry-wide basis. That may take time; possibly world, the copper industry may well be mindful of nickel’s even decades some industry sources say, and require the experience in the late 1990s/early 2000s. Miners will want to incremental implementation of small scale projects. be certain that processes to treat copper concentrate with high In the interim, while a lasting solution is sought, copper any meaningful extent. industry costs inevitably will rise further as declining ore grade profiles continue and development of copper deposits which The advent of nickel pressure acid leach (PAL) projects using host higher concentrations of deleterious elements becomes hydrometallurgical technology was heralded as the industry’s increasingly necessary to meet demand. salvation, enabling low cost processing of previously hard to increase in copper output in the first half 2014, and a 4% decline in net unit cash costs to $1.73/lb. Half year changes are charted on page 14 and the ranking table on page 12. It is important to note these figures are adjusted to show attributable copper production and as a result may not correspond with companies reported figures. Talking to the first half performance by company, Rio Tinto reported a strong first half with an improved performance at Bingham Canyon and the ongoing commissioning of Oyu Tolgoi with volumes up 9% and costs falling by 17%. Codelco, meanwhile reported a 4% increase in production and an impressive 23% decline in unit costs, the combination of a sharp increase in output at Chuquicamata and the start of production of the low cost Hales mine. Cost rises, on the other hand, were most pronounced at First Quantum and Antofagasta. At the latter, costs were adversely impacted by lower gold and molybdenum credits at Centinela Concentrates, a one-off signing bonus with labour unions, and the completion of mining at El Tesoro’s low cost Mirador open pit. At First Quantum, higher costs were chiefly due to higher mining costs at the flagship Kansanshi mine related to the relocation of waste dumps and lower gold credits. A fall in grade at Guelb Moghrein also made a contribution to higher costs. MAJOR COPPER PROJECTS Project Company Location Process Type Aktogay Kazakhmys KazakhstanConc/SX-EW2 New Project 104 2,000 2015/16 Buenavista SX III Southern Copper Mexico SX-EW Expansion 109 444 2014 Buenavista Southern Copper Mexico Concentrate Expansion 170 1,384 2015 Caserones JX/MitsuiChile Conc/SX-EW New Project 180 4,200 2013/14 Cerro Verde expansion Freeport Peru Concentrate Expansion 272 4,600 2016 Las Bambas MMG Peru Concentrate New Project 400 5,900 2015 Morenci Freeport United States Concentrate Expansion 102 1,600 2014 Sentinel First Quantum Zambia Concentrate New Project 300 1,900 2014 Sierra Gorda KGHM/Sumitomo Chile Concentrate New Project 220 3,980 2014 Tia Maria Southern Copper Peru SX-EW New Project 120 1,400 2017 3 Additional Production1 Capex US$M Start Date Measured in "thousand tonnes per year" 2 SX-EW production to start 2015, concentrate 2016 3 SX-EW production started 2013, concentrate 2014 1 Source: GFMS, Thomson Reuters 17 MINE AND REFINED PRODUCTION impurities are viable on a wide scale before adopting them to GFMS COPPER SURVEY 2014 UPDATE TC/RC AND THE COPPER PRICE 35 Copper 500 30 400 300 20 15 10 5 200 Benchmark TC/RC Spot Price (¢/lb) TC/RC (¢/lb) 25 100 0 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 N.B. TC/RCs are expressed on a combined basis not including price participation Source: GFMS, Thomson Reuters; LME MINE AND REFINED PRODUCTION REFINED PRODUCTION Global refined production has grown strongly in the first half of 2014, rising by 5% year-on-year. Capacity expansions in China, improving concentrate availability on top of the continued rise in concentrate production have all played a role, even though mine output growth actually fell short of its full potential in January to June. We estimate that global copper cathode output reached 10.6 million tonnes during the period, with the bulk of that around half a million tonne increase accounted for by China, as smelter capacity there expanded, global mine output rose and smelters moved to process previously stockpiled concentrate. Outside China, the most notable increases were posted in the Democratic Republic of Congo (DRC) and in the United States, which helped to more than offset declines to date in some major producing nations such as Chile. Supplies of secondary feed were reported to be relatively tight in the first half of 2014. Nevertheless, production of copper from secondary sources still rose, we estimate, by more than 3% year-on-year during the period. Declines in output from secondary material in the first half appear to have been confined to a handful of countries. Our sources have indicated that scrap supplies have eased recently, albeit not to any great extent, and weaker prices will likely leave the industry watchful of curtailments from this source. Either way, the prospect of ample and growing concentrate supply and the incentive of high and rising processing fees will still leave refined copper production on a strong upwards course over the medium term, with Chinese smelters leading the way. Output in China has continued to grow despite occasional, well-flagged problems. In March, for example, Jinchuan declared force majeure on some copper concentrate purchases after technical problems 18 at an oxygen facility. Latest figures from the National Bureau of Statistics indicate that Chinese copper output jumped 11% in the first eight months to 4.930 million tonnes and by 20% year-on-year in August alone to 680,128 tonnes. While we allow for an element of double counting within these statistics, we still expect Chinese output to jump by almost 10% this year to approach 6.9 million tonnes. Additions to capacity in China this year are expected to boost refinery capacity by around 800,000 tpa. Expansions include the ramp-up of Jinchuan’s 400,000 tpa in Guangxi, and at projects owned by Dongying Fangyuan Copper, and Henan Yuguang Gold and Lead. As mentioned, rising treatment and refining charges are encouraging custom smelters globally to produce more. Spot TC/RCs for clean, standard concentrate in China, for example were recently quoted at $119/tonne and 11.9 cents/lb, which compares with around $87/tonne and 8.7 cents/lb respectively in July, when concentrate exports from Indonesia were still suspended, and with around $105/tonne and 10.5 cents in January. Reuters News recently reported that Chinese smelters are likely to increase spot purchases of concentrates in the next couple of months. They are also expected to ask for higher benchmark processing fees next year. Indeed, Japan’s Pan Pacific Copper, which is likely to set the tone for other smelters, recently said it will be seeking a 9% increase to more than $100/tonne and 10 cents from this year’s benchmark of $92/tonne and 9.2 cents. The copper market may have been unnerved amid tight market conditions by news in May of problems at LSNikko Copper No. 1 and No. 2 units, although production in South Korea actually rose around 8% in the first half of 2014. The No. 2 unit (290,000 tpa) at LS-Nikko’s operations was closed first after a steam explosion, while the 200,000 tpa No. 1 unit was shut down following a fire at a cooling tower. In Japan, the region’s second largest producer, cathode output was up around 5% year-on-year in the first six months of 2014, underpinned by higher processing fees and strong domestic demand in infrastructure work as the rebuild in the northeast of the country continued after the 2011 major earthquake and tsunami. In early October, Mitsubishi Materials announced that it would cut its output by 11% to around 142,000 tonnes in the six months through to end-March 2015, citing a maintenance closure during the period. The Saganoseki GFMS COPPER SURVEY 2014 UPDATE and Tamano facilities are scheduled to close for maintenance in the final quarter of this year. However, the country’s smelters are still targetting 3% year-onyear growth for the October to end-March period. Indian output was substantially higher in the first half, boosted by a return to normal operation at Sterlite’s Tuticorin smelter after it was closed from April to June last year following a gas leak. Cathode output during the March to June quarter was 66,000 tonnes versus 16,000 tonnes a year earlier and was achieved despite a 23-day maintenance shutdown at the smelter during the period. Cathode output at the company’s associated Silvassa refinery fell by almost one-fifth or 65,000 tonnes in 2013. In the DRC, SX-EW output, which accounted for around 95% of the country’s total last year, rose by more than one-fifth year-on-year in the first half. Glencore’s Katanga and Mutanda operations, which were reported to have reached 200,000 tonnes per annum (tpa) capacity by the end of last year, continued to make significant and increasing contributions. Further gains are expected through to the end of the year and beyond with the addition of a further 100,000 tpa of capacity at Katanga’s Luilu facility. Output at Luilu rose despite continuing, albeit improving, disruptions to power, the company said. Against this backdrop, it is worth reiterating concerns voiced earlier this year that a lack of power might peg back production growth in Katanga province in coming years, giving rise to a degree of caution over expansion plans in the country. MINE PRODUCTION WINNERS AND LOSERS, H1 2014 VERSUS H1 2013 -25 kt -10 kt -5 kt -1 kt +1 kt 5 kt +10 kt +25 kt Source: GFMS, Thomson Reuters 19 MINE AND REFINED PRODUCTION Elsewhere in the region, refined output in Kazakhstan dropped by around one-third in the January to June period from a year earlier, as a result of the closure last September of Kazakhmys’ Zhezkazgan smelting-refining operation. Kazakhmys is in the process of restructuring, and, as part of this, ownership of the smelter will be transferred to private company Cuprum Holding. The transfer of assets is due to be completed by the end of the year. The company recently said the Disposal Assets’ management team was conducting an assessment of the benefits of restarting the facility in the final quarter of this year. Also worth a mention in Asia, is the more than halving of output at Glencore’s Pasar operation in the Philippines as it struggled to recover after sustaining structural damage from Typhoon Haiyan late last year. The plant was closed in early November 2013 and only seems to have resumed meaningful production levels in May. The year-on-year comparison in the second half is likely to look more favourable in light of the aforementioned closure last year. MINE AND REFINED PRODUCTION GFMS COPPER SURVEY 2014 UPDATE In the meantime, output in Africa’s other major producer, Zambia fell year-on-year in the first half. SX-EW output was stable over the period, but primary production from concentrate recorded a double-digit drop amid declines at both Mopani and Konkola. Poland registered the most significant decline in secondary output in the first half of the year in both volume and percentage terms, although higher production of primary metal from concentrate helped to mitigate the negative impact on the total figure. Copper cathode output in Chile fell by around 3% in the first half from year ago levels, as a 7% decline in SX-EW supply more than offset a modest rise in production of primary metal from concentrate. Largely to blame was a near-one-quarter decline in output at Codelco’s Radomiro Tomic SX-EW facility to 156,000 tonnes, while output at the smaller Gaby operation also fell by around 20%. We are expecting some improvement in the second half of the year, but do not believe that this will be sufficient to prevent a fifth successive year of declines in Chilean refined copper output, with SX-EW production falling around 4% from 2013. We understand that output at Freeport’s Atlantic Copper smelter-refinery in Spain may have been adversely affected by the suspension of concentrate exports from Indonesia and the company’s large Grasberg mine. First half figures do not seem to support this view, although it is possible that output was constrained somewhat from July ahead of the resumption of shipments, and that this has yet to reflect in numbers. Freeport said that in the first half Atlantic Copper took 31% of its concentrate from its North American mines, 22% from its South American mines and just 4% from Indonesia, which was shipped before the suspension. Brazilian refined copper output in the first half of 2014 was curtailed by around 20,000 tonnes as a result of unscheduled maintenance work at the country’s sole smelter and electrolytic refinery Camacari, owned by Caraiba. The company said its main priority was to continue to pursue high utilisation levels of installed capacity, which it put at 280,000 tpa of primary copper. Production in North America, and more particularly the United States has benefitted in the first half of this year from stronger output at Rio Tinto’s Kennecott operations. In the first half the unit produced 123,200 tonnes, up 38% from a year earlier, while in the second quarter output of 70,000 tonnes was almost 80% higher yearon-year. The positive comparison was largely down to the impact last year of the pit wall slide at the Bingham Canyon mine, although cathode output in the second quarter was also brought forward in advance of a 65-day planned maintenance shutdown which was scheduled to start in September. In Europe, production in Germany, the region’s top producer and home to Aurubis, the world’s second largest producer of refined copper, was lower in the first half. Ramp-up at the company’s Hamburg operation took longer than expected after major maintenance and repair work was carried out in September/October 2013, and the negative impact on concentrate throughput carried over into the first quarter of 2014. The company said that scrap supplies have also been tight, although it had managed to secure sufficient material at all times. The country’s secondary output was slightly lower than in the same period last year. 20 GFMS COPPER SURVEY 2014 UPDATE GLOBAL COPPER CONSUMPTION BY END USE (YEAR-ON-YEAR CHANGE IN VOLUME, H1 2013 AND H1 2014) 3. CONSUMPTION 200 • • The mature economies, which saw copper demand growth return to positive territory in the second half of 2013, have accelerated. Indeed, in stark contrast to recent years, the percentage growth rate in the United States and the EU was very similar to that of China in the first six months of this year, albeit with Chinese growth on a very different trajectory. The performance in mature economies was bolstered by autos and private sector construction. H1-14 160 140 • In China, the slump in the property market has been a key contributor to the overall easing of growth there. When coupled with an industrial sector which has seen growth fall to multi-year lows it is unsurprising that copper demand growth has fallen. However, it is noteworthy that the lag between construction starting and copper use means that demand for the red metal from this sector is still growing appreciably. What’s more, the growth in Chinese copper demand still accounted for 53% of the global increase. H1-13 180 Tonnes (thousands) Global refined copper consumption rose by 4% in the first half of 2014, while a little slower than in the second half of last year, this rate matched the improved growth rate recorded overall in 2013. This performance though masks a significant acceleration in demand growth in mature economies which has been offset by a slowdown in China. 120 100 80 60 40 20 0 -20 Building Electrical Transport Consumer Industrial Source: GFMS, Thomson Reuters MATURE ECONOMIES UNITED STATES OF AMERICA Demand in the United States has continued its gradual recovery from the 2009 lows as consumption in the first half of the year increased by 2.9% to 900,000 tonnes. However, this apparently steady growth rate masks a sluggish start to 2014 as the economy spluttered, due at least in part to a particularly severe winter, before much more rapid growth thereafter. This pattern has been seen across all segments of demand with the second quarter of the year marking sharp acceleration. • • Despite this, the transportation sector globally has been the star performer so far in 2014, with 7% growth aided chiefly by surging car sales in the United States, China and at last in the European Union. Despite the acute decline in copper’s use in the construction sector in the later years of the last decade due to the combination of a tumbling property market and substitution losses (particularly for plumbing tube), it remains by far the largest category of copper demand. The sector consists of building wire, plumbing and heating, air conditioning and commercial refrigeration, builders’ hardware and architectural. The long-awaited upturn in this sector finally arrived in earnest in 2013. Furthermore, it has quickened over the first half of 2014, to rise almost 6% and send demand to its highest since the second half of 2008. Driving the uptrend has been GLOBAL COPPER CONSUMPTION BY END USE (000 tonnes) H1.12 H2.12 H1.13 H2.13 H1.14 H1.12 H2.13 H1.14 Building construction 2,976 3,125 3,092 3,250 3,231 -3% 0% 4% 4% 4% Electrical and Electronic products 3,729 3,837 3,912 4,084 4,029 1% 4% 5% 6% 3% 1,115 1,144 1,147 1,206 1,223 4% 3% 3% 5% 7% 951 1,000 965 1,063 1,027 -5% -1% 1% 6% 6% 959 962 953 998 1,005 -2% -2% -1% 4% 5% 9,731 10,068 10,068 10,601 10,515 -1% 2% 3% 5% 4% Transportation Equipment Consumer and General Products Industrial Machinery and Equipment Total % y-o-y H2.12 H1.13 Source: GFMS, Thomson Reuters 21 CONSUMPTION The picture in a number of emerging markets has been distinctly disappointing. This is most acutely noticeable in Brazil and Russia where copper demand in both countries has actually dropped year-on-year. While the exact causes vary vastly from policy paralysis and arguably the World Cup in Brazil to geopolitical tensions and sanctions in Russia, the net result is tumbling consumption from the transportation sector in both countries. GFMS COPPER SURVEY 2014 UPDATE GLOBAL COPPER CONSUMPTION BY REGION (YEAR-ON-YEAR CHANGE IN VOLUME) GLOBAL COPPER DEMAND BY END USE Industrial Machinery & Equipment 9% 500 Building Construction 31% Transportation Equipment 11% H1-14 400 Tonnes (thousands) Consumer & General Products 10% H1-13 300 200 100 0 -100 BRICS (ex. China) Source: GFMS, Thomson Reuters Electrical & Electronic Products 39% Source: GFMS, Thomson Reuters CONSUMPTION the strength in the residential property sector, a key consumer of copper in the form of building wire. The rate of expansion slowed briefly at the start of 2014, owing in part to abnormally poor weather, but soon picked up with a vengeance. Starts over the first six months rose 6% from the corresponding period of 2013 while housing completions rose 15% year-on-year during the period. Such solid growth has helped to balance the more erratic performance seen in non-residential construction. As a result, semi-fabricators have generally reported robust demand for their products such as electrical building wire, and have been amongst the beneficiaries of an improving housing market. The performance of the building wire sector has been assisted by the fact that copper remains the material of choice for this application, owing to its superior conductivity and the failure of past experiments with aluminium. This has historically limited the extent of substitution away from copper in this sector, in contrast to other products such as plumbing tube, where the development of cheaper alternatives China Mature Others Global has dented copper’s market share irrevocably. That said, there are signs that aluminium is gaining market share in building wire in the United States. Meanwhile, the transportation sector similarly saw further growth fuelled by the automotive sector which continues to recover from its recession lows. Indeed, by August new car sales and light trucks had recovered to their highest annualised rate since 2006 at 17.4 million and up 10% year-on-year. What’s more, there is a slight uptrend in the usage of copper per vehicle. The increased requirement for wiring sparks greater copper use which is only partially offset by thrifting. Demand from the aviation industry has also been robust, with deliveries from Boeing on course to increase some 11% for the year as whole. Overall, we estimate growth in copper use in transportation equipment to be up almost 5% in the first half of 2014. The weakest area of copper demand in the US was the electrical and electronic products segment, which WINNERS AND LOSERS IN FIRST HALF 2014, BY MAJOR GROUPINGS AND CONSUMING COUNTRIES (000 tonnes) Consumption H1.13 H1.14 Global Total 10,068 10,515 Change H1.14 vs H1.13 % Share of Change Percent H1.13 H1.14 447 4% 100% of which Mature 2,964 3,111 147 5% -15% 100% 35% of which BRICs 5,109 5,350 241 5% 102% 54% China 4,260 4,499 238 6% 92% 53% United States 875 900 25 3% 6% 6% Germany 568 587 18 3% -3% 5% Japan 479 511 32 7% -5% 8% Russia 333 328 -5 -1% 10% -1% Italy 295 311 17 6% 0% 4% Turkey 223 229 6 3% 3% 1% Brazil 206 202 -4 -2% 1% -1% Source: GFMS, Thomson Reuters. Note that totals may not add due to independent rounding. 22 GFMS COPPER SURVEY 2014 UPDATE UNITED STATES COPPER CONSUMPTION BY END USE (000 tonnes) H1.12 H2.12 H1.13 H2.13 H1.14 H1.12 % y-o-y H2.12 H1.13 H2.13 H1.14 Building construction 371 373 385 393 406 -1% 1% 4% 5% 6% Electrical and Electronic Products 183 169 185 167 173 -1% -3% 1% -1% -6% Transportation Equipment 121 113127 119133 Consumer and General Products 96 90 98 94 104 0% 2% 2% 4% 6% Industrial Machinery and Equipment 82 66 81 68 84 -3% -6% -2% 3% 5% 853 810 875 841 900 2% 1% 3% 4% 3% Total 19%7%5%6%5% Source: GFMS, Thomson Reuters suffered particularly from the poor weather at the start of the year that hit demand, for example for aerial transmission cables. The subsequent improvement in the weather has seen consumption recover but weak demand from utilities for distribution cables means this sector remains the laggard for US copper demand. The downturn in demand in Q1 from copper in consumer and general products was less steep than in other sectors. However, weak consumer confidence led to lacklustre retail spending at the start of 2014 and ensured sales of consumer electronics started the year poorly. Nevertheless, the rebound arrived sooner and more sharply than in the electrical sector. EUROPEAN UNION In contrast to the US, EU demand started 2014 rising strongly year-on-year with signs of a broadening economic recovery. Against this backdrop, the longawaited pick-up in copper demand that had begun in the closing months of 2013 accelerated. Indeed in January the Markit Eurozone Manufacturing PMI data had soared to the highest level since June 2011 as the region exited recession and as growth picked up elsewhere in Europe too, for example in the UK. Even more encouragingly, the recovery spread such that by April all countries covered by the Eurozone PMI indicated growth for the first time since November 2007. Growth was again led by Germany, while Spain and Italy, which had struggled for so long, also posted robust gains on renewed strength in exports. Both our own field research and reporting by European consumers indicated this widespread improvement Consequently, the fastest growing segment of European copper demand lay elsewhere, namely in transportation equipment. Our figures indicate that consumption in the first half of the year in this area was up by over 9% to 205,000 tonnes, a three-year high. Crucial to this upturn has been the long awaited pick-up in European auto sales. Registrations of both passenger and commercial vehicles have grown strongly in 2014, despite signs of a slowdown in year-on-year growth in vehicle registrations for both categories. This recovery is widespread with France the only major market not benefitting directly from an improving domestic market. Furthermore, exports to North Africa for wiring harnesses have risen strongly, with just the occasional exception when political turmoil has struck. Meanwhile demand from the aviation sector has also been robust, with offtake more a reflection of continued strong deliveries of planes than of the deceleration in orders which has taken place so far in 2014. The largest area of copper demand in Europe, namely building and construction which represents 38% of the total, has also recovered, with consumption of building wires growing sharply. The 5% increase in demand from this area to 616,000 tonnes saw offtake rise to its highest level since the second half of 2011. Underpinning 23 CONSUMPTION Looking ahead, with building-related copper products generally consumed at the latter stage of the construction cycle, the ongoing strength in the housing market looks set to continue to filter through to boost copper consumption from the construction sector over the coming months. in conditions was felt across the continent’s copper consumers and in all sectors, albeit to varying degrees. Growth has been stellar in high-voltage submarine cables in Northern Europe, aided by the growth in offshore wind projects. This contributed to the healthy 6% increase in fabrication demand from the electrical and electronics segment in the first half of the year. However, the weakness in the power distribution business for both low and medium voltage cables was held back by lower capital expenditure by utilities. Meanwhile, despite an upturn in activity in the telecommunications sector the further loss of market share means that copper demand from this area continues to languish. GFMS COPPER SURVEY 2014 UPDATE EU-28 COPPER CONSUMPTION BY END USE (000 tonnes) H1.12 H2.12 H1.13 H2.13 H1.14 H1.12 % y-o-y H2.12 H1.13 H2.13 H1.14 Building construction 610596587596 616 -13%-6%-4% 0% 5% Electrical and Electronic products 387 -8% Transportation Equipment 195 178 188 188205 Consumer and General Products Industrial Machinery and Equipment Total 369 368 370 389 -3% -5% 0% 6% -7%-8%-4% 6% 9% 95 85 93 89 98 -13% -12% -2% 5% 5% 302 276 293 284 310 -7% -7% -3% 3% 6% 1,589 1,503 1,528 1,529 1,619 -10% -6% -4% 2% 6% Source: GFMS, Thomson Reuters CONSUMPTION this was building construction (i.e. excluding civil engineering) which as measured by Eurostat, was up some 7.4% year-on-year in the first three months of 2014. This was aided by double-digit growth in Germany and construction up by over a fifth in Spain (albeit from pitiful levels). However, demand from civil engineering was steady rather than spectacular and building construction has clearly slowed over the summer. Indeed, economic indicators, particularly consumer confidence, have shown a marked slowdown over the summer months. However, our field research suggests that while copper demand growth ebbed in the middle of the year this was largely a reflection of seasonal trends rather than any drop in underlying demand. Geographically, as mentioned, the upturn has been widespread across the continent, with the southern markets including Spain, finally starting to pick-up. As a result, we estimate consumption in the largest European consumer, Germany has risen by 3% to 587,000 tonnes and consumption in Italy is up by an even more rapid 6%, meaning it is on course for the first annual increase since 2010. It is also worth noting that the recent events in Ukraine, while appearing to have knocked consumer confidence in some parts of Europe, do not seem to have had any appreciable effect on EU copper demand, at least to the time of writing. The exception to this positive pattern is that copper use is down in Scandinavia. We believe this is not a reflection of economic activity but instead due to the closure of flat rolled product capacity at Finspang in Sweden which has led to a slight redistribution of flat rolled products output across the region. Overall, consumption in the European Union is up 6% compared to a year earlier, to 1.62 million tonnes in the first half of this year. This is the highest half yearly total since the first six months of 2011. In addition to the already mentioned factors demand for refined copper has gained from a relative shortage of scrap. This shortage appears to have eased a touch over the summer months, helped in part by the continued absence of substantial 24 Chinese scrap purchasing. This slight easing of scrap availability, combined with the slowing of the European economy, means we would expect the growth rate in refined copper demand to ease in the remainder of the year. However, we would still expect growth to occur as the recent steps from the ECB should provide some solace to domestic demand and the consequent weakness of the euro in recent weeks means that exporters will undoubtedly benefit. JAPAN The recovery in the Japanese economy picked up pace in the first quarter of this year, spurred in large part by the (then) impending increase in the consumption tax from 5% to 8%. As a result copper demand was up by almost 10% in the first quarter of this year. Subsequently, the increase in the consumption tax has sparked a sharp slowdown in the second quarter both in the economy and in copper demand. Overall, for the first half of 2014 demand is 7% higher, at a three-year high. Unsurprisingly, given the sales tax increase, consumer and general products saw an even more spectacular start to the year as consumers brought forward purchases of consumer electronics. In keeping with the growing market for mobile devices, especially smartphones, demand for ultra-thin copper foil used in highperformance applications was robust. Therefore, and despite a slowdown in growth from April, demand from consumer and general products was up 14% year-on-year for the first six months of 2014. Meanwhile, domestic demand continues to be bolstered by more infrastructure work to rebuild the northeast of the country after the 2011 earthquake and tsunami and to prepare for the 2020 Olympic Games to be held in Tokyo. Japan’s domestic copper demand has also been aided by the construction of solar power plants which have boosted demand for electric cables. As in most of the mature economies, demand was also strong from the transportation sector, with sales of GFMS COPPER SURVEY 2014 UPDATE GLOBAL SEMICONDUCTOR BILLINGS MATURE ECONOMY COPPER CONSUMPTION 4000 Canada United States Japan Tonnes (thousands) 3000 2000 1000 0 H1-09 H1-10 H1-11 Source: GFMS, Thomson Reuters; ICSG H1-12 H1-13 200 Europe Other Asia Pacific Americas Japan Electronics Fabrication 160 automobiles rising very rapidly at the start of the year as consumers brought forward purchases. However, after the tax rose on April 1st auto sales have dropped back markedly, to a three year low by August, and consumption has eased, albeit not as sharply. 160 120 120 80 80 40 40 0 0 H1-08 H1-09 H1-10 H1-11 Source: GFMS, Thomson Reuters; SIA H1-14 200 Global Electronics Fabrication (tonnes) EU-28 Global Semiconductor Billings (millions of USD) Ch4 Mature economies consumption H1-12 H1-13 H1-14 Against this backdrop the actual state of copper demand in the world’s largest consumer has actually held up better than some may have expected. This is partly a reflection of some copper-specific factors and, to a lesser extent, government attempts to stimulate the economy. Arguably the single most important factor has been a relative shortage of scrap leading to a greater use of refined metal by semi-fabricators. This post-tax increase slowdown is, in our view, likely to have finished by the end of the third quarter. However, year-on-year comparisons will be harmed over the following six months as they compare to the period of peak activity ahead of the change. A more substantial upturn is unlikely until it becomes crystal clear that the second leg of the proposed sales tax increase (currently scheduled for October 2015) is nearer and more certain. Thus far in 2014 Chinese GDP growth has, by its own stellar standards, been modest, at 7.4% and 7.5% for the first and second quarters of the year respectively. Furthermore, two of the areas which are vital for copper demand have been creaking even more, namely property and industry. In addition, the level of power grid investment by the State Grid Corporation of China has been well below its own targets so far this year, while it has been audited. The biggest sector of Chinese copper consumption is electrical and electronic products, which accounts for nearly half of total domestic consumption of the red metal. Growth in this sector slowed unexpectedly in the first half of the year, dragged down by the lack of investment by the top Chinese power grid operators. At the beginning of 2014, the investment plan announced by the State Grid Corporation of China and China Southern Power Grid was to increase spending by 12% year-on- THE BRICS JAPANESE COPPER CONSUMPTION BY END USE (000 tonnes) H1.12 H2.12 H1.13 Building construction Electrical and Electronic products Transportation Equipment H2.13 H1.14 76 76 77 83 84 190 187 189 186 187 H1.12 % y-o-y H2.12 H1.13 H2.13 H1.14 -4%6% 1%8%9% -13% -1% -1% 0% -1% 3531313433 46% -4% -13%7% 8% Consumer and General Products 60 59 57 64 65 -7% -1% -5% 9% 14% Industrial Machinery and Equipment 135 128 126 142 142 2% -3% -7% 11% 13% Total 497 481 479 509 511 -4% 0% -4% 6% 7% Source: GFMS, Thomson Reuters 25 CONSUMPTION CHINA Overall, Chinese copper consumption has risen by 6% year-on-year in the first six months of the year and, while substantially weaker than the growth rate in 2013, it means we still expect demand to be almost half a million tonnes higher in the whole of 2014 compared to last year. While this increase is less than that seen in many recent years it is still very considerable for the copper market. By way of context, it is larger than total demand for Brazil and the United Kingdom combined. GFMS COPPER SURVEY 2014 UPDATE CHINA COPPER CONSUMPTION BY END USE (000 tonnes) H1.12 H2.12 H1.13 H2.13 Building construction Electrical and Electronic products H1.14 988 1,082 1,063 1,150 1,125 1,966 2,031 2,131 2,260 2,220 H1.12 % y-o-y H2.12 H1.13 H2.13 H1.14 3%3%8%6%6% 6% 6% 8% 11% 4% Transportation Equipment 378 410 415460 455 5% 3%10%12%10% Consumer and General Products 431 488 457 530 491 2% 6% 6% 8% Industrial Machinery and Equipment 185 199 194 211 208 2% 1% 5% 6% 7% 3,949 4,209 4,260 4,610 4,499 5% 5% 8% 10% 6% Total 7% CONSUMPTION Source: GFMS, Thomson Reuters year, which would have been a sharp increase on the 5% growth in 2013. However, the work undertaken by the State Grid Corporation of China has been sluggish so far in 2014. This appears to have been caused by the auditing of the organisation which has already reportedly uncovered $1bn of misappropriated funds. Consequently, grid investment in the first half of the year totalled RMB 164.9 billion, according to NBS figures, down 0.6% year-on-year. Therefore, we estimate consumption in Chinese electrical and electronic products had year-onyear growth of “only” 4%, to 2.2 million tonnes in the first half of 2014. Looking to the second half of the year, we estimate growth will accelerate slightly to 5% year-onyear given the impending roll out by the government of Ultra High Voltage cables and new energy projects. same period of 2013. There were two main catalysts for this more rapid growth in the air conditioner sector. First, domestic growth in demand was strong, up some 10% compared to a year earlier. Second, demand was also higher from overseas, due to an uplift in consumption by other countries and also to the depreciation of the RMB which made Chinese producers more competitive. The trials and tribulations of the Chinese property sector have been the area of greatest concern for the state of copper demand so far in 2014. However, for now, copper consumption by the building construction sector has been supported by two factors. First, there is a substantial lag between the decline in property starts and this feeding through into copper demand and second, the robust state of output of air-conditioners in the first half of 2014. The brightest spot of Chinese copper demand for the first half of the year was the transportation equipment sector as it grew by 10% to 455,000 tonnes. According to the Chinese Association of Automobile Manufacturers (CAAM), the total sales of passenger vehicles jumped by 11.2% year-on-year in the first half of 2014 to 9,094,000 units. Sales have also remained strong in July and August as China remains the largest and most rapidly growing major market. Demand is also being bolstered by the rising market share of premium brands with their higher level of gadgetry which use more copper wiring. Looking in more detail at the property market, the total amount of Chinese commercial housing sold in the first half of the year amounted to 483.65 million sq. metres, down by 6% year-on-year. Demand in the eastern part of the country substantially underperformed even this poor performance, as it was 14% lower. Furthermore, property sales have been weak despite some recent policy loosening in second and third tier cities. From a copper demand perspective future prospects are gloomy as the 16% drop in floor space started in the first half of 2014 is likely to feed through into weak copper demand from this sector in 2015. The air-conditioner market has bolstered this sector as it has achieved year-on-year output growth of 16% over the first six months of this year, compared to 5% during the 26 However, output is expected to decelerate in the second half of 2014. This will be a function partly of the usual slowdown in the second half of the year but weak electricity consumption also shows that the country has slowed down at the start of the third quarter. Finally, we believe that stocks of air conditioners have also risen to above normal levels which may lead to some destocking. Another sub-sector of particular strength are new electric passenger cars, which saw sales soar for the first seven months of the year, up 280% on the level a year before, to 25,946 units. Electric vehicles have approximately three times the copper content of typical passenger vehicles. We would acknowledge though that the total copper usage in this area is still only a small fraction of that used in conventional automobiles. In a very similar vein, production of hybrid cars has risen tenfold over the same timeframe. However, volumes are even more miniscule than that of pure electric vehicles in China and usage of copper is closer to double, rather than treble, the amount in a conventional family car. GFMS COPPER SURVEY 2014 UPDATE 10 50 40 6 30 4 20 2 10 0 % Change y-o-y Million Units % y-o-y change 8 0 H1-10 H1-11 H1-12 H1-13 H1-14 Source: GFMS, Thomson Reuters; CAAM Floor Space of Newly Started Buildings* (y-o-y %) CHINA FLOOR SPACE OF NEWLY STARTED HOUSING PERCENTAGE CHANGE* CHINESE AUTO SALES BY HALF-YEAR 100 80 60 40 20 0 -20 -40 Jan-08 Jan-09 Jan-10 Jan-11 *3 Month Moving Average Source: GFMS, Thomson Reuters; NBS Jan-12 Jan-13 Jan-14 The rail sector is an important area of transportation demand for copper in China. Indeed, investment in railway construction was up 20% year-on-year over the first eight months of 2014 compared to the same period a year earlier, according to data from the China Railway Corporation. This has been achieved following a splurge of investment in July and August and means that 46 of a total of 64 projects were completed by the end of August. Accordingly, and unlike in recent years, this sector is on course to complete its ambitious targets. In the whole of 2014 some 800 billion yuan is to be invested in Chinese railways which will ensure that demand from the sector will remain strong throughout the year. ahead, output is set to see continued strong growth, supported by the 4G infrastructure investment. The prospects for auto demand are also promising. Central and local government initiatives to eliminate high-polluting vehicles look set to ensure robust replacement demand. For example, since 1st September 2014 the government has exempted new energy cars from a 10-percent purchase tax and this is set to last to the end of 2017. REST OF THE BRICS While the Chinese economy has slowed, its growth rate remains the envy of the other BRICs. In fact, the first half of 2014 has seen copper demand in Brazil and Russia actually fall compared to a year earlier. In Russia, while the escalating events in Ukraine do not seem to have had any appreciable effect on European Union copper demand there has been a slowdown in the Russian economy, partly as a result of the sanctions that have ensued and the increased uncertainty. This has seen the Russian economy stagnate over the past six months or so and copper consumption has been particularly hit by the slump in sales of cars and light commercial vehicles which are down by 12% for the first eight months of the year. Furthermore, the situation is deteriorating with sales down 26% year-on-year in August, and GM in Russia announcing that it would be closed for all but a handful of days in September and October. Overall, Russian copper demand in the first half of the year was down 1% to 329,000 tonnes. 27 CONSUMPTION Chinese copper consumption in the consumer and general products sector achieved 7% year-on-year growth in the first half of 2014, similar to the growth rate in 2013. The strong upturn in sales (and hence production) of smartphones and tablet devices is a key driver of demand in this area. A series of factors stimulated sales of the smartphone in the first half of 2014, including the accelerated transition of 2G subscribers to the 3G/4G network and the replacement demand stimulated by attractive 4G packages. However, it is worth cautioning that where sales of these devices are replacing sales of traditional PCs, and not just adding to the number of electronic devices, this is actually leading to a loss of copper consumed overall as the volume of copper in them is much smaller than in traditional PCs. Looking Turning to the smallest category of copper consumption in China, the industrial machinery and equipment sector, demand increased by 7% year-on-year in the first half of 2014. This level was constrained by faltering industrial activity, in addition to the ongoing government-induced slowdown in the property sector and, as a result, growth was half the 2010/2011 average. The scale of the slowdown in the industrial sector is highlighted by the drop in industrial production growth to a five-year low of 6.9%, the weakest growth rate since December 2008. GFMS COPPER SURVEY 2014 UPDATE CONSUMPTION In addition, Russia eliminated a 10% tax on cathode exports, which was reintroduced in 2010, by signing a law on July 24th. This was passed in order to comply with rules governing its WTO membership, although it was undertaken considerably ahead of a 2016 deadline. This move is likely to have the effect of boosting Russian exports of cathode as opposed to semi-finished products (the country has been a big exporter of wire rod in recent years). Naturally this would lower copper consumption in Russia but it should benefit other wire rod producers, most likely those based in Europe and the Middle East. Recent field research suggests that at the time of writing the immediate impact appears to have been minimal. It is also worth noting that the vast bulk of Russian cathode is 99.5% purity whereas much of the cathode used in Europe is high grade. Turning to Brazil, the picture becomes even gloomier from both a general economic standpoint and from the perspective of copper demand. Consumption in the largest South American user of the red metal has dropped by 2% year-on-year in the first half of 2014 to 202,000 tonnes. Just as in Russia, transportation has been the weakest sector, with car sales down some 8% year-on-year in the first half and exports of autos 35% lower over the same timeframe. As a result, we estimate copper demand from this sector was down some 14% over that period. Overall, the third quarter has seen copper demand continue to languish as the economy has almost certainly tumbled into recession, exacerbated from an economic standpoint by a series of public holidays to mark the fact that the football World Cup was being staged there. Meanwhile demand for aerial transmission cables for the power sector has also softened so far in 2014. The prospects in Brazil are partly contingent on the presidential election that is pending at the time of writing. Overall, it is hard to imagine that the Brazilian economy is not set to improve from its poor performance over the past six months, especially as some infrastructure is still to be built for the 2016 Olympics. India in contrast provided some good news on the demand front. Copper demand has at least grown in the first half of this year, by an estimated 4% to 321,000 tonnes. Even this mediocre performance was helped by no repeat of the shutdown of the Birla smelter a year earlier (this had restricted supply to local cable manufacturers and engineering firms in May 2013). Looking ahead, India’s prospects appear to be improving, however this does rely on the new Modi government starting to deliver on its promises. 28 REST OF THE WORLD Demand in the rest of the world is up 3% in the first half of 2014 compared to a year earlier, slightly faster than the pace at any time since the first six months of 2010. As ever with such a disparate group the overall performance masks some stark contrasts. At one end of the spectrum lies Australia, suffering from the effect of the Chinese slowdown which is triggering slower growth in the Antipodean island. This has particularly affected the mining sector with knock-on impacts for industrial machinery and building and construction. The latter is not helped by the competitive pressures from Asian neighbours. That is only likely to be compounded by the Federal government’s new free-trade deal with South Korea, which cut the 5 per cent tariff on copper products imports from that country. The latest symptom of this is the announcement in September of the closure of the Crane copper tube business. Copper demand is already down by half from its 2008 level in this country. In addition to the aforementioned potential gain from the free trade deal with Australia, South Korea, the largest consumer in this category, has seen demand start to grow again after three consecutive years of declines. Crucial to this turnaround was the pick-up in the underlying economy after a trough in late 2012/early 2013. At the other end of the spectrum in tonnage terms, lies the continued growth in demand from the United Arab Emirates due to the growth in semi-manufacturing capacity. This boost is chiefly from energy cables to feed the ongoing expansion of the Gulf Cooperation Council’s infrastructure networks. This is having a similar, if more muted impact, in Saudi Arabia. THE GFMS TEAM AT THOMSON REUTERS GRATEFULLY ACKNOWLEDGES THE GENEROUS SUPPORT FROM THE FOLLOWING COMPANIES FOR THIS YEAR’S GFMS COPPER SURVEY AND ITS UPDATE The Center for Copper and Mining Studies, CESCO, is an independent, non-profit organization whose mission is to contribute to the design and debate of public policies which foster the best use of the mining industry’s potential for the development of economies of mineral producing countries, with a special focus on Chile. Throughout its history, CESCO has positioned itself as a meeting point for diverse sectors that include academia, policymakers, professionals and those involved in the mining-business in order to promote ideas and discuss criteria about public policies related to economic and mining activities. KGHM is a Poland-based and globally operating mining company, with more than half a century of experience in the industry. It is the world’s leading copper and silver producer, with the offered range of products also including rhenium, lead, gold, molybdenum, nickel and platinum group metals. KGHM has a broad portfolio of producing, development and exploration projects, spanning the globe in Poland, Germany, Canada, Chile and the USA. In July 2014, the company started production in its copper, molybdenum and gold mine in Sierra Gorda, which is located in Chile’s Antofagasta region. Gfms Copper market Research and forecasts SEEK MORE CME Group, the world’s leading and most diverse derivatives marketplace, is where the world comes to manage risk. Our exchanges offer the widest range of global benchmark products across all major asset classes, as well as clearing and settlement services for exchange-traded and over-the-counter products. NYMEX and COMEX are now a part of CME Group and our Metals futures markets include full-size contracts on gold, silver, platinum, palladium, copper, steel and aluminum; and smaller size contracts for gold (E-micro 10 oz.), silver (SIL 1,000 oz.) and copper (E-mini 12,500 lbs.). With an average daily volume of more than 350,000 futures and options contracts traded, our Metals markets are the most liquid in the world for these products. Additionally, we offer clearing services of OTC London Gold spot and forwards and Iron Ore Swap futures through CME ClearPort. Dig deeper into the copper market with Gfms research and forecasts on Thomson Reuters Eikon. Use the new Gfms copper pages to quickly understand the key drivers behind market movements. see which factors drove price performance in the past, what will drive the evolution of these markets in the future, and what is happening inside these sectors today. GFMS copper pages include: • Historical supply and demand statistics • forecasts of supply, demand and price • field research reports on key markets • Exclusive analyst commentaries giving expert insight on news and market development To find out more contact us on [email protected] For more information visit thomsonreuterseikon.com © 2014 Thomson Reuters. 1006308 03/14. 1006308_v2.indd 1 14/03/2014 16:49 GFMS COPPER SURVEY 2014 UPDATE ©2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content is prohibited without the prior written consent of Thomson Reuters. “Thomson Reuters” and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies.
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