Copper: Healthy Mine Growth Ahead Despite Headwinds

BMI View: We expect global mined copper production to record annual growth above 3% for the period to 2016, when output will reach 19.3mnt (million tonnes). While our forecast growth rate is noticeably higher than the previous decade, we note that many of the projects which have been announced of late are unlikely to come to full fruition given our below consensus view on copper prices as well as rising costs which will delay capital expenditure plans and this is incorporated into our forecasts. The main growth drivers will be Chile and China, which are already the two largest copper producers, as well as Zambia and the DR Congo, which will record some of the fastest rates of growth as the copperbelt region in central Africa becomes a key players in global copper mining.

We forecast global copper production to reach 19.3mnt (million tonnes) in 2016, marking average growth of 3.5% per annum. On the one hand, this growth marks a significant increase compared with the previous decade when growth averaged 1.5%. However, we have incorporated into our forecasts a scepticism as to whether many of the projects announced will come to fruition and expect significant declines in planned capital expenditure over the coming quarters.

Growth To Pick Up
Global - Copper Production & Growth

Chile and China will be the main drivers of growth in copper mined output adding 480kt and 351kt to global annual output by 2016, respectively. While this is significant, it marks relatively low growth in these countries compared with historical levels as a combination of lower prices, falling grades at some of the largest mines and the lack of low-cost projects will restrict growth. In addition, given our below consensus views on Chinese economic growth we expect Chinese refined copper consumption to come in below expectations. Copper production in China and copper exports from Chile, the largest copper exporter to China, will see lower demand and thus we expect both countries to cut back on projects as the extent of China's slowdown becomes apparent.

Copperbelt To Become A Major Producer
Global - Largest Forecast Increases In Copper Mine Production 2011 - 2016 (kt)

Copperbelt To Play Significant Role

We expect the copperbelt regions of Zambia and the DR Congo to be key drivers of growth in mined copper output over the coming years. As well as their significant resources, the countries boast some of the largest high-grade deposits due to come online in the next five years. The Konkola and Kamoto mines are estimated to contain grades above 3.0%, which is significantly higher than the global average of 0.6%. This will be an increasingly important issue as some of the world's largest mines, such as Antamina in Peru, Escondida in Chile and Grasberg in Indonesia, have experienced falling ore grades and thus higher extraction costs. Indeed, as we expect oil prices to stay elevated for the foreseeable future, we anticipate margins will remain relatively tight and thus the attractiveness of high-grade, low cost mines in DRC and Zambia will increase. Furthermore, given our below consensus view on copper prices, forecasting an average of US$7,800/tonne in 2012 and US$7,200/tonne in 2013, we expect miners to be increasing concerned about cash costs as margins are squeezed.

Growth To Peak In 2015
Select Countries - Forecast Increase In Copper Mine Production (kt)

The density of projects towards the end of the forecast period indicates that there is set to be a significant increase in supply in 2014 and 2015. This surge in output could reverse the persistent under-supply in the global copper market which has been a key reason for copper's outperformance over the past few years. That said, we have previously highlighted that projects could be at risk from declines in capital expenditure, noting Peru as a country where rising costs and political interference are likely to combine with lower prices to delay projects. Therefore we note Xstrata's Las Bambas mine and Anglo American's Quellaveco are some of the mega-copper projects which are most likely to be delayed.

Source: BMI, Company Announcements
Country Company Mine Expected Output Year
Mongolia Rio Tinto & Ivanhoe Oyu Tolgoi 450ktpa 2013
Chile Teck Resources Pelambres North 215ktpa 2013
Chile Xstrata/Anglo American Collahuasi Increase from 535ktpa to 1mntpa 2014
China Continental Minerals Xietongmen 230ktpa 2014
Peru Xstrata Las Bambas 400ktpa 2014
Mexico Grupo Mexico Cananea 450kpta 2015
Peru Anglo American Quellaveco 225ktpa 2015
Zambia Vedanta Konkola Double to 400ktpa 2015

Risks To Outlook

Most of the risks to our production forecast are weighted to the downside. A significant decline in copper prices, perhaps instigated by a slowdown in China even sharper than our expectations, would see a swathe of projects cancelled as they become economically unviable. Second, the current trend of governments seeking greater control in their mining sectors may also dissuade future investment if those countries were to lose competitiveness. This is particularly important in central Africa as both the DR Congo and Zambia have raised taxes on mining recently. If these governments sought to raise duties or increase government control too much, we could see projects being cancelled and a lack of new investment.

Source: BMI, WBMS
2009 2010 2011 2012e 2013f 2014f 2015f 2016f
Copper Mine Production (kt) 15,804 16,118 16,222 16,721 17,281 17,944 18,630 19,285
% chg y-o-y 0.9 2.0 0.6 3.1 3.3 3.8 3.8 3.5
This article is tagged to:
Sector: Mining
Geography: Global, Congo, Chile, China, Mongolia, Zambia

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