A N A LYS T F O C U S - CO P P E R A N A LYS T F O C U S - CO P P E R

Copper
annually. In order to balance the market
domestically, it therefore needs to
import about 2Mt. Based on the current
import numbers, China is forecast to
Investor attitudes towards the copper space have changed for the better since
import 1Mt more than it needs this
early 2009. year.

I
nvestor attitudes towards copper
and copper miners have changed
for the better since early 2009. This
improved sentiment, barring some
limited nearterm corrections, should
continue to prevail in the marketplace
well into 2011, as the China-led global
recovery continues to firm materially,
the U.S. and Europe emerge from
Market participants are no longer
debating if the world economy will
plunge into a prolonged depression,
which would destroy commodity
demand for years, but rather if strong
growth can be sustained for a prolonged
period.
This change in the world view is quite
a fundamental departure from that
These concerns seem to be reinforced
by a rise in LME and Shanghai
inventories, which may be interpreted
to imply that the scarcities of the metal
in the Chinese domestic market are
easing and that less imports are likely
going forward (Fig 2). LME stockpiles
are at their highest since May, while
Shanghai inventories are at the highest
level in more than five years.

recession and restocking commences
outside of China.
Massive government spending
commitments (totalling some US$2.2T
globally) in China (US$586B), the U.S.
(US$787B), Europe and elsewhere,
extremely low interest rates, a more
stable credit environment and record
Chinese commodity imports (associated
with restocking, lack of secondary
supply, and FX hedging) have all helped
to improve the global demand outlook
for copper.
Supply/Demand Balance
Expected to Tighten
With stronger demand prospects,
markets are anticipating tighter supply/
demand conditions going forward.
Figure 1
which was present during the dark days
of late-2008 and early 2009 and is to a
great extent responsible for the strong
recovery in copper markets and the
commodity outlook generally.
The initial phase of the copper market
recovery has unwound the impact of the
extremely sharp correction precipitated
by the global credit crisis (and the
massive de-leveraging it caused).
The second phase, which is already
under way and is a big contributing
factor to the most recent rally, will
likely build on firming demand and
tightening physical supply/demand
conditions (Fig 1).
The third phase, which depends on
sustained growth in China and the
G7 (albeit at modest rates compared
to recent years), should support
commodity demand and higher prices
over the long term.
Short-Term Downside Risk
—Moderating Chinese Imports
and U.S. Macro Data Potential
Catalysts
Despite the robust longer-term outlook
for copper and recent market resilience
in the face of sliding Chinese imports
and poor U.S. data, there exist near-
term downside risks that are worth
exploring. Investors are concerned
over the strength of the global
recovery, especially in the U.S., and the
sustainability of record-setting Chinese
imports.
Not all of the inventory increase is
readily available. There is an estimated
450–500kt held by China’s SRB
following purchases of 235kt this year
and a generally discussed 150kt held in
bonded warehouses, which are likely
not readily available commercially over
the short term. As such, the growth in
available consumer stockpiles of copper
is approximately 600–700kt.
Nonetheless, the implication is that
the Middle Kingdom will need to slow
down imports into 2010, especially
if secondary supply recovers. Odds
are that Western restocking and
consumption growth globally will take
up much of the slack in the global
market resulting from potentially lower
Chinese imports, serving as an offset.
However, if the timing is not right, lower
Chinese imports could trigger a sell-off
in the near term.
Recent corrections following poor
economic data and the consequent
reduction in risk taking and the short
U.S. dollar/long commodities trade
implies that the market may trade lower
if additional negative news arrives.
Demand is still poor, prices are at
the top of the cash cost curve and
it is unlikely that the U.S. dollar will
continue to weaken relative to the euro
indefinitely. Given that copper rallied on
surging Chinese imports, strongerthan
expected U.S. economic numbers and a
weakening U.S. dollar, a disappointment
on any of these fronts could precipitate
Figure 2
reason to think a correction is possible
if a negative catalyst materializes.
However, so far, markets have not
forced copper materially lower even
as Chinese exports dropped sharply
in October and there were several
disappointing U.S. data points. Money
managers seem to be looking beyond
the short term, where they see growing
demand and potential shortages.
Demand in Recovery Mode
After a Dismal H1/09 in the
Western World
The deep recession in the industrialised
world, the material slowdown in
Chinese manufacturing activity that
has resulted from the collapse of export
markets in the aftermath of the credit
crisis and massive destocking will likely
precipitate a 3.8% (to ~17.3Mt) drop in
global copper demand in 2009.
Given that the Western world bore
the brunt of the fallout from the
financial crisis, it’s no great surprise
that the bulk of the copper demand
contraction has occurred in the world’s
highly industrialized economies, with
demand forecast to decline for the third
consecutive year. After dropping by 4%
in 2007 and 7% in 2008, consumption is
forecast to fall 15% in 2009 to its lowest
level since 1983.

China produces some 4Mt and profit taking. The fact that investors In sharp contrast, given robust
consumes about 6Mt of copper have gone long copper is another economic activity in China in response

This research has been provided by BMO Capital Markets.

36 Global Mining Finance 2010 37
To view the full 2010 sector update, please visit www.globalminingfinance.com.
 A N A LYS T F O C U S - CO P P E R
Figure 3
to the US$586B government spending
program (focused on fixed asset
investment), Chinese consumption
should actually jump as much as 20% in
2009 (Fig 3).
Consequently, copper demand
for all emerging economies should
grow by more than 4%. The surge in
infrastructure spending, including
ongoing investment within the power
sector and the lack of secondary supply
has prompted record refined copper
imports. September shipments into
China were up 149% year over year and
157% year to date. Imports into China
are running at about 290kt monthly
this year. This was perhaps one of the
biggest surprises of the year.
Figure 4
38 Global Mining Finance 2010
Strong Chinese demand also reflects
major increases in credit availability
and money supply growth (Fig 9). A
material rebound in manufacturing in
response to rising exports to the West
and restocking should also provide a
big lift down the road.
After a dismal eighteen months,
BMO Research expects a recovery in
global copper demand next year and
in 2011, with consumption forecast
to expand more than 9% (to ~18.9Mt)
by 2011. Indeed, consumption has
jumped sharply already and is on track
to increase by ~9% in H2/09 relative to
H1/09.
China and the developing world will
very likely drive the recovery in the
same way as these regions kept demand
from collapsing in 2009. Furthermore, in
2010 and 2011, they will increase their
consumption in an environment where
the G7 countries are adding to global
demand.
After many years of detracting from
global demand growth, the U.S. should
help to lift copper consumption.
The U.S. will likely continue to ramp
up spending, keep interest rates at
extremely low levels and provide ample
financial sector liquidity for most of
2010.
Out of the US$787B allocated for the
U.S. stimulus program, only about a fifth
to a quarter has been spent so far.
Much more of the U.S. stimulus
money is to come out by end of fiscal
2010 (US$178B in direct spending and
over US$100B in tax initiatives), with
maximum impact occurring in Q4/09–
Q2/10.
Homeowner incentives should help
housing to slowly recover. President
Obama is set to sign a bill that extends
unemployment insurance benefits for
up to 20 additional weeks in some high-
unemployment states and that extends
the $8,000 home buyer tax credit for
first-time buyers to April and provides
a new credit of up to $6,500 credit to
many buyers who already own a home.
This is important since U.S. home
builders are the biggest users of the
metal, using an average about 440lbs
per house (Fig 4).
A N A LYS T F O C U S - CO P P E R
Refined copper consumption in
the world’s advanced economies is
forecast to grow about 1.4% in 2010
and a stronger 1.9% in 2011 (Fig 5).
This forecast reflects the combination
of pent up consumer and business
demand, restocking and the coming to
fruition of many government-backed
infrastructure initiatives.
However, longer term growth is
likely to be somewhat muted due to
the depth of the downturn and the
still lingering problems in the western
world’s financial system. Demand
Figure 5
within the mature economies will also
be hampered by increased market share
of global demand from some of the
copper market over the long run as
developing economies, namely China
well, bringing about the possibility of
and India.
“auction” pricing where prices clear
above the industry cost curve.
Supply Issues Driving Copper Nonetheless, despite very robust
Market into Deficit Territory efforts on the part of producers to
by 2011 reduce supply and possible deficits
Growing demand and supply issues, in 2011, the sharp demand decline in
ranging from large swaths of the 2009 is expected to precipitate another
industry negotiating labour contracts primary copper surplus (~ 110kt) in 2010,
over the next year, to declining ore escalating the 675kt build this year.
grades and a relatively modest and However, labour strife and production
uncertain project pipeline, are likely to disruptions could materially cut this
place the copper market into a deficit by build. Firms with projects representing
2011. A structural deficit environment ~33% of global production are set to
could materialise in the physical primary negotiate their labour contracts by the
Figure 6
This research has been provided by BMO Capital Markets.
39
To view the full 2010 sector update, please visit www.globalminingfinance.com.
 A N A LYS T F O C U S - CO P P E R A N A LYS T F O C U S - CO P P E R

end of the year or are already taking
industrial action (Fig 6). Disruptions
continued to impact the copper market
in recent weeks, providing price support
in November and likely well into 2010.
The combination of further industrial
action, mechanical failures and reports
of underperforming mine production
will likely limit supply growth next year.
Labour actions include BHP’s Spence
mine in Chile, where workers stopped
BMO thesis that the
fundamental commodities story
is bullish remains intact.
Mine output continued to lag
expectations in recent months due to
other technical issues—substantial
for the Middle Kingdom to account for
over 70% of all consumption growth
long term, taking their overall copper
needs to 8.3Mt by 2014. This represents
40% of total global demand, up from
the 28% (5.0Mt) of overall demand in
2008. India’s robust long-term growth
prospects will add fuel to the China-
driven demand story as well.
The longer-term copper price outlook
is upbeat as the BMO thesis that the

work in mid October. This action is in
addition to the ongoing strike at Vale’s
Sudbury and Voisey’s Bay operations in
Canada. No copper had been produced
at either division during Q3/09 and it
looks as if very little may be coming out
in Q4/09. While the operations mainly
produce nickel, they have a significant
amount of copper by-product: 106kt/a
at Sudbury and 40kt/a at Voisey’s Bay.
The potential for strikes at Codelco’s
Andina and Codelco Norte divisions
whose contracts expire at the end of
November and December respectively,
where the Codelco workers will most
likely want the same generous deal
offered to workers at Escondida.
Codelco syndicates 1-3 are in the midst
of negotiations.
Potential work stoppages by Peru’s
28,000 mining industry workers
(who pump out an estimated 1,230kt
annually or 7.9% of global mine supply)
may cause labour-related production
reductions by the most in recent
memory (Fig 7).
Figure 8
damage to a main haulage shaft and
head frame at BHP’s Olympic Dam mine fundamental commodities story is
bullish remains intact.
in Australia due to mechanical failure
The need for massive infrastructure
is a case in point. This resulted in the environment in the not-so-distant
spending associated with
company declaring force majeure on future.
industrialization and urbanization in
some of its copper shipments, with Prolonged periods of very tight
the developing world is not expected
mine output cut by ~75% through to markets are a real possibility given the
to diminish.
March 2010. The estimated production amount of new capacity that will be
Additionally, given that BMO does
loss through the rest of the year will required to balance the market. The
not expect outsized short-term and
likely be 35kt. likelihood of developing the pipeline of
longterm production growth due
Palabora Mining, in Africa, reported a projects ranges from high probability
to industrial actions, modest capex
15% decline in mined output during Q3 spending and what may be aggressive to fairly low probability. Furthermore,
over Q2, while Xstrata reported a 9.6% management timetables, a return to there is a very broad spectrum of risks
year-on-year decline in mine production tight market conditions may occur in present, ranging from technical to
in its Q3 financial results, with output fairly short order. This could very well financial that could prevent projects
falling from 235kt Cu in Q3 last year to prompt a potential “auction” pricing from materializing as planned (Fig 8).
212kt Cu this year.
The combination of a series of
announcements of lower-than-expected
production and labour issues could see
output disruptions due to “unforeseen”
events at a minimum of 700–900kt in
2010, and possibly much higher.
Due to these factors, BMO Research
has therefore cut its 2010 production
estimates by some 200kt. This should
help to unwind the inventories that
accumulated over the last several years,
tightening the copper market and
lifting prices to historically high levels
in 2010/11.

Firm Demand, Production

Risks Spell Good News for
Copper Prices Long Term
With the developing world set to
keep copper demand growing and a
recovery in the Western world, copper
consumption in 2010 through 2014 is
expected to grow a robust 3.9% CAGR.
This is up smartly from the ~2.8% annual
growth trend seen in recent years.
Figure 7

The importance of China to this

picture is critical, as the projections call

This research has been provided by BMO Capital Markets.

40 Global Mining Finance 2010 41
To view the full 2010 sector update, please visit www.globalminingfinance.com.