Copper producers are reinventing themselves. No, they have not given up on copper. Far from it—the top copper producers are expanding both exploration and production.
What is changing is the quality of the ore they mine and sell, prompting them to adjust their operations and move exploration to the top of their to-do lists.
China Shakes Things Up
Most everyone knows China is the world’s largest consumer of copper, gobbling up some 40% of the annual global copper demand. What most may not know is that China has been smelting more and more copper itself in an effort to lower import costs.
Over the years, China has managed to increase its domestic copper smelting capacity up to 73% of its annual demand, up from 57% in 2004. Producing more refined copper within its own borders means less high grade copper and copper cathode ore imported from abroad.
Instead, what China is buying now is raw copper concentrates—just that plain old crushed-up copper ore that it needs to feed its smelters.
China is still importing some refined copper and copper cathode ore to make up for that 27% shortfall in domestic production. But as February import figures show, imports of refined copper over the past 12 months have been cut almost in half, while imports of raw copper concentrates rose by 8.6%.
China now imports 3 times more in concentrates than its does cathode, calling on copper producers to adjust their operations to accommodate the shift in demand.
As a case in point, “BHP Billiton's President of Base Metals Peter Beaven said last week the company is considering installing crushing and concentrating equipment at [its] Spence [mines],” reports Fox Business. “A move into copper concentrate production is also under study at BHP's Cerro Colorado facility, which currently also produces cathodes only.”
Higher Grades Elusive
This shift in demand could not have come at a better time. The quality of accessible copper ore has also shifted, with so many existing mines quickly running out of the higher grade ores.
“Chile, the world's biggest copper-producing country, is facing changes in ore types,” Fox Business explains. “Oxide-containing copper ore, which is suitable for higher-value cathode production … is depleting … leaving sulphate-containing ore … suitable only for concentrates production.”
What is left is the same lower grade copper concentrates that China now wants more of. That is quite the stroke of luck. Just as so many copper mines have nothing left but the cheap stuff, China comes out with an increasing demand for it.
Strong Demand Prompts More Exploration
But the rest of the world still wants the high-grade ore, and the demand for copper cathode is still there, driving producers to ramp up production in anticipation of improving demand down the line.
The housing recovery well underway in the U.S. is expected to absorb some of the excess copper currently stockpiled. “John Petrie, a senior market strategist at Zaner Group in Chicago, said in a telephone interview [with Bloomberg], ‘The housing market has made strides in clearing [copper] inventory, and the better U.S. numbers in general are important in helping the psychology of the market,’” Here, he referred to U.S. durable goods orders and housing reports out at the end of March.
As for the rest of the world, “Demand in China will grow at an annual pace of 4 to 5 percent in the next five years, while consumption in other emerging economies in Asia, Latin America and Africa will expand by 3 to 4 percent,” continues Bloomberg. “Global copper demand growth will accelerate to 4.2 percent this year … Morgan Stanley estimates.”
This is urging mining companies to step-up their exploration efforts to replenish their depleting high grade copper reserves.
Peter Beaven, president of base metals at BHP Billiton (NYSE:BHP), informed at a press briefing last week that his company is exploring for copper only. John MacKenzie, copper division chief at Anglo American (LSE:AAL), has made copper an exploration priority, with at least 8 or 9 of the company's mines looking for more.
Even though copper stockpiles at the London Metal Exchange’s warehouses have increased recently, driving the copper price down over the last several weeks, increasing demand over the longer term coupled with falling ore grades are expected to drive the metal’s price higher, moving some traders to buy on the dips.
“We just initiated a long copper trade,” CableABC.net last week quoted commodity strategist Natalie Rampono at ANZ in Melbourne. “Bargain hunting may be modest right now, but we‘re still expecting demand to improve in the second quarter and the market is short. Given prices have sold off quite heavily, it could represent a good chance for some near-term upside.”
So while copper producers reinvent themselves, shifting their focus to other types of ore grades, some traders are reinventing their portfolios, shifting funds to copper on the dips.
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