Case Study of Copper Prices
S&P on Copper Prices
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Copper
– High (but declining) levels of refined copper inventory due to soft global demand
are still pressuring copper prices. Although copper prices have gradually
improved to 71 cents per pound in 2003 (which is near Standard & Poor's base
case assumption of 72 cents) from 65 cents per pound at the end of 2002,
current price levels are still historically weak, reflecting all the uncertainties
surrounding global economic performance this year.
– Demand continues to play a heavy role in pricing despite the efforts by leading
producers to reduce production levels (as was the case of Minera Escondida
Ltda., which announced a cut of its Phase IV expansion production by 200,000
tons in 2003). So far, large copper producers such as Corporacion Nacional del
Cobre de Chile (Codelco) and Minera Escondida, which operate at very
competitive cost levels of below 50 cents per pound, have been able to report
stable profitability, owing to improved cost positions and new technologies to
increase productivity. Medium-to long-term credit trends, however, remain
dependent upon global demand patterns (fundamentally reflecting infrastructure
spending), and the pace of production increases (either as idled capacity is
restarted or new capacity is added) when economic conditions start improving
again worldwide.
History of Copper Demand
• Prior to the Second World War, demand grew at
an annual rate of 3.1%.
• During the post war expansion years (1945 to
1973) demand grew by 4.5% per year.
• Since the first oil shock of 1974, demand has
grown by 2.4% per year.
• During the 1990's, demand for copper has
resumed at an above average rate of 2.9%.
Copper Reserves
• Copper is distributed in the earth's crust and oceans in various
forms and concentrations, which form the overall resource-base for
copper.
• Often, there are references to "world reserves" of a metal. Reserves
indicate the amount of material that can be economically extracted
or produced at the time of determination. Improved extraction
techniques and technologies, new discoveries, depletion, and
changes in economic conditions are some of the factors that alter
reserve levels. For instance, world copper reserves have jumped
from 90 million tones in 1950 to 280 and 340 million tones in 1970
and 1998, respectively (Source: United States Geological Survey,
USGS).
• Similarly, resource levels change as well. The USGS estimated in
1999 that world resources were at 2.3 billion tones of copper.
Copper Consumption
Copper Consumption
Copper Consumption per Capita
• As world population continues to expand,
demand for copper tends to increase as
well, while remaining sensitive to
variances in economic cycles, changes in
technology, and competition between
materials for use in applications.
Regional Production
Copper Cost of Production
• Technology requires that copper be input in the form of copper
sulphate. To get this from oxides is fairly straightforward. However,
most of the world's copper does not come from oxide minerals, it
comes from the sulphide mineral chalcopyrite. Sulphides carry an
electrostatic charge opposite to that carried by the bubbles. The
process was invented by a metallurgist who saw miners wives using
it to get their husbands work clothes clean.
• The costly parts of this are:
– 1. Crushing (high energy consumption high capital cost)
– 2. Froth flotation (high energy consumption high capital cost)
– 3. Transport of concentrate (may be only 10-25% Cu, you pay for the Fe
+ sulphur)
– 4. Smelting (High capital and energy consumption)
– 5. Dissolution of smelter copper and electro winning (relatively cheap
part of process).
Supply Responses to Prices
• The world's third-largest copper producer, said that its
idled US copper operations are unlikely to reopen for
years and that it has talked to potential buyers without
success. The U.S. operations (San Manuel, Arizona,
Pinto Valley -- adjacent to the proposed Carlota Copper
Project, and Robertson in Nevada) produce 1.7 percent
of the world's copper supply. The closure helped raise
copper prices from the 63 cents per pound 12-year low
last March to 87 cents per pound in January. However,
world production continues, including from the world's
largest mine in Chile, owned by BHP.
• The industry is swamped by over capacity, cheap
imports, and prices near the all-time low.
Copper Consumption by Region
Copper Prices in 1969 Prices
Freeport Cost Structure
Cost Structure of Copper Companies
1
0.9
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0.1
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Phelps Dodge
Magma Copper
ASARCO
Freeport
1984
1986
1988
1990
1992
1994