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My article titled ‘Give It
A Doubt’ was about population growth, urbanization in
developing countries and the one billion people predicted to join the
consuming classes by 2025.
“One billion people will enter the global consuming class by 2025.
They will have incomes high enough to classify them as significant consumers
of goods and services…” McKinsey Global Institute, Urban world: Cities
and the rise of the consuming class
Some of these new consumers are going to be Americans but the majority are
in developing countries, they might not want to be Americans but they do want
at least a modest piece of what we’ll call the American lifestyle, the cell
phones, flat screen TV’s, a nicer apartment, a car or maybe a motorcycle,
washer/dryer, a fridge, AC - the amenities of a modern society and all the
necessary infrastructure that goes with a well functioning competitive modern
economy.
But what if all these new one billion consumers were to start consuming,
over the next 12 years, just like an American? What’s going to happen to the
world’s mineral resources if one billion more ‘Americans’ are added to the
consuming class?
Let’s look at copper - here’s how much copper each of them would need to
consume, per year, to live the American lifestyle…
Per capita consumption of copper in the United States was 10 kilograms per
person 1965, the same in 1995. In Japan per capita consumption increased from
6 kilograms per person to 11 kilograms per person over the same time period.
Copper consumption in Korea in 1965 was less than 1000 tons. By 1995, Korea's
consumption of copper had reached 637,000 tons, or more than 14 kilograms per
person.
In China, even after years of economic growth, per capita copper usage is
about 5.4 kg. As China's populace urbanizes, builds up its infrastructure and
becomes more of a consuming society, there's no reason to suspect Chinese
copper consumption won't approach or even surpass U.S., Japanese and  South Korean levels. There's 1.3 billion
people in China, several billion more in developing countries - India, with
its 1.2 billion people, is presently using 0.5 kg of copper per person.
Africa, the fastest growing continent, has virtually no copper consumption
per capita.
One billion new consumers by 2025. Can everyone who wants to live an
American lifestyle? Can everyone everywhere have everything we in the
developed parts of our world have?
“Concern about the extent of mineral resources arises when the stock
of metal needed to provide the services enjoyed by the highly developed
nations is compared with that needed to provide comparable services with
existing technology to a large part of the world’s population. Our
stock data demonstrate that current technologies would require the entire
copper and zinc ore resource in the lithosphere and perhaps that of platinum
as well. Even a lower level of services
could not be sustained worldwide
because a continuing supply of new metal is needed to make up for inevitable
losses in the recycling of the metal stock-in-use.
Substitution has the potential to ameliorate this situation, but one
should not automatically assume that technology will produce a satisfactory
substitute for every service at an affordable price and precisely when
needed.
…anthropogenic and lithospheric stocks of at least some metals are
becoming equivalent in magnitude, that world-wide demand continues to
increase, and that the virgin stocks of several metals appear inadequate to
sustain the modern ‘‘developed world’’ quality of life for all Earth’s
peoples under contemporary technology…Do we really envision a developed world
quality of life for all of the people of the planet…?” R. B.
Gordon, M. Bertram, and T. E. Graedel, Metal Stocks and Sustainability
According to the International Monetary Fund (IMF) the consumption of
metals typically grows together with income until real GDP per capita reaches
about $15,000–$20,000 per capita (2005 international $) as countries go
through a period of industrialization and infrastructure construction.
 
Countries by 2012 GDP (PPP) per
capita, based on World Bank figures and current Int$
A few country’sstand
out as well below the IMF’s $15,000.00:
- China – $9,233
- Indonesia – $4,956
- Philippines – $4,410
- India – $3,876
- Pakistan – $2,891
Since they are still a considerable distance from the point where further
increases in GDP per capita no longer increase copper consumption per person,
China, Indonesia, the Philippines, India and Pakistan (and the other 113 out
of 180 countries listed below the IMF’s 15,000 Int$ cutoff) are likely to
continue to add significantly to global demand for copper for some time to
come.
Capex/opex costs escalating
Mining is getting more difficult. The low hanging fruit has been found and
put into production long ago. And these deposits are showing their age,
here’s an example…
BHP Billiton just announced (Oct. 20th 2015) copper output dropped 3% yoy
and 13% compared to last quarter because of declining grades at Escondida,
the world’s largest copper mine. The company also said that despite plans to
spend billions of dollars on operational improvements, including a $3.4
billion water project, the anticipated 27% decline in grade would be only
partially offset.
Mining is an extremely capital intensive business for two reasons. Firstly
mining has a large, up front layout of construction capital called Capex -
the costs associated with the development and construction of open-pit and
underground mines. There are often other company built infrastructure assets
like roads, railways, bridges, power generating stations and seaports to
facilitate extraction and shipping of ore and concentrate.
Capex costs are escalating because:
- Declining ore grades means a much larger relative scale
of required mining and milling operations. As a rule grades are higher
at current mining operations than at development stage projects – so
costs are going to be higher to remove/process the same amount of ore.
- A growing proportion of mining projects are in remote
areas of developing economies where there’s little to no existing
infrastructure.
There is also continuously rising Opex, or operational expenditures, to
consider. These are the day to day costs of operation; rubber tires, wages,
fuel, camp costs for employees etc.
“A typical mining contract no longer specifies just rents and
royalties, payable to the state. It specifies exactly what the mining firm
will build—a power plant, a water-supply system, a communications network—and
how these things will be shared with the public.” The
New Bronze Age, Tim Heffernan
The bottom line? It is becoming increasingly expensive to bring new mines
on line and run them.
Disruption allowance
Copper mining is notorious for disruptions and analysts use a “disruption
allowance” – 800,000 to 1,000,000 tonnes per annum.
According to ICBC Standard Bank, 2015 has seen a record 1.33m tonnes of
mine disruptions and that does not include the latest power shortages
(forcing production cutbacks) in Zambia.
Reasons for disruption in mining are numerous:
- Weather/Natural Disasters – Rain caused flooding or the
opposite, drought causing water shortages, hurricanes, earthquakes
(recent 8.3 magnitude earthquake in Chile).
- Technical problems – Commissioning delays, slower
ramp-ups, 45% of supply growth is coming from greenfields projects.
- Power shortages – Chile, Zambia.
- Labor activity – Contract revisions, mine, rail and port
strikes, environmental protests. Over 15% of production had labor
contracts up for renewal in 2015. Workers at some of the world’s largest
mines - Freeport McMoRan’s Grasberg in Indonesia and BHP
Billiton/Glencore’s Antamina in Peru - were to renegotiate contracts in
2015. Bloomberg, in April, reported almost a 10th of global copper
output was at risk of being lost due to labor disruptions in 2015
affecting 1.5 million metric tonnes or 8.2% of annual production.
- Older mines reaching end of mine-life - Falling grades,
dirty concentrates (laced with arsenic).
- Declining price environment - Project deferrals,
mothballing and downsizing of mine plans.
- Resource Nationalism – Resource nationalism is the
tendency of people and governments to assert control, for strategic and
economic reasons, over natural resources located on their territory ie.
Indonesian ban on unrefined ore exports.
All these reasons are combining to tighten metal supply, push many markets
into future deficits and are laying the groundwork for price gains.
Supply-side disruptions
There have been supply-side disruptions, including periods of drought
followed by incessant rains and floods in Chile the world’s largest copper
miner. The Chilean copper association has reduced its production
targets for 2015 as a result of weather disruptions.
Grades are expected to fall at Escondida (the world’s largest copper mine)
as well as the Collahuasi JV between Anglo and Glencore.
Chilean state copper company Codelco is running into serious problems in
maintaining production, let alone increasing it. Aging mines, high capex
requirements and a $21 billion funding shortfall by the Chilean government to
fund Codelco’s production plans is leaving Codelco wondering how to keep
production flowing.
There have also been mining operation disruptions in Indonesia. The
country imposed a ban on exports of unprocessed ores negatively impacting
copper exports. Workers also blockaded PT Freeport’s Grasberg Mine in
Indonesia.
Clashes between police and protesters left four people dead at MMG’s Las
Bambas mine in Peru. Opposition from rural communities to mining in Peru
(world’s third largest copper producer) is very strong.
In Zambia, Canadian miner First Quantum said power restrictions are likely
to hit copper supplies. In September 2015, Glencore announced its idling
mines in Zambia and the Democratic Republic of Congo (DRC).In a bid to cut
costs, Glencore will reduce output by 400,000t at its African copper mines
over the next 18 months removing 1-2% of copper supply from the market.
A copper mine in Papua New Guinea is stopping production due to dry
weather.
Freeport-McMoRan announced announced in August it is cutting output at its
El Abra mine in Chile in half and idling two US mines. Freeport also has
predicted lower output at its massive Grasberg mine in Indonesia related to
El Niño weather patterns.
Anglo American’s Los Bronces mine in central Chile, the world's
sixth-largest copper producer, is being affected by water scarcity. Anglo
warned in February that the drought Chile was suffering could drop production
by 4% off the company’s total production for the year.
Cochilco, Chile’s copper commission, states water scarcity is "a
latent risk for mining in Chile".
“Lower rainfall and river flow has led the levels of aquifers and
reservoirs to drop or dry up completely, giving miners fewer options. In
Chile, the situation is complicated by the fact that many of its copper mines
are located in the Atacama, the world's driest desert.
Output at BHP Billiton's Escondida, the world's largest copper mine,
in the bone-dry Atacama, fell 2 percent in the second half of 2014, weighing
on a strong operating performance.”Drought in Chile curbs copper
production, to trim global surplus, Reuters
Chile produces a third of the world’s copper and has seen a seven fold
increase in energy costs over the last ten years, also because of a severe
water shortage in the high desert, where most of the country’s major copper
mines are located, water must be pumped from the ocean to almost 800 meters
above sea level and then pumped hundreds of kilometers to the mines, of
course the seawater must also be desalinated.
Capital Economics’ senior commodities economist Caroline Bain has numerous
concerns regarding the copper market;
“Persistent strike action at Latin American copper mines as well as
planned closures…El Niño’s potential impact on supply…the weather phenomenon
may lead to another bout of floods at mines in Latin America – heavy rains
and flash floods in Chile forced several copper mines to suspend operations
in March this year – and unusually dry weather in Indonesia.”
Capital Economics also says:
- Exports from Indonesia’s Grasberg copper mine will be
affected by a “lack of water in rivers to transport the metal to the
port”.
- Electricity shortages in Zambia are also expected to
weigh on supply. As water levels at its hydropower dams dried up after a
drought last month, the country’s power providers announced a 30%
reduction in supply to mines.
A long term structural trend in the copper mining business started to
become evident two decades ago. Shortfalls in targeted production are now
characterized by a fall in grades and recoveries as well as unexpected
disruptions.
Brook Hunt
“Since 2000, average head grades for copper, without adjusting for
production weightings, declined from 1.3% to 1.1% in 2012. Furthermore, the
weighted average head grade for mined copper is likely less than 1% as
several of the world's largest copper mines have been in production for many
decades and are now mining extremely low grade ore (less than or equal to
0.5% Cu). As head grades decline, costs rise for a given tonnage."
~ Kitco.com, Multi-Year Global Copper Market Outlook
A Yale University study said new discoveries of copper have raised global
reserves by just 0.63 percent per year since 1925 but usage has risen at 3.3
percent per year.
“Copper does not often appear in a pure form in nature, the way gold
forms nuggets. Instead, it combines with other elements to form stony
minerals, of which the copper makes up only a small part. Fifty years ago,
ore from the average pit mine was 1.5 percent copper. Most of that rich ore
is gone: The average today is 0.6 percent. For every ton of copper extracted,
nearly 167 tons of ore is processed and nearly 167 tons of tailings produced.”
The New Bronze Age, Tim Heffernan
Country Risk
Resource extraction companies, because the number of discoveries was
falling and existing deposits were being quickly depleted, have had to
diversify away from the traditional geo-politically safe producing countries.
“For many developed nations within the Organization for Economic
Co-operation and Development (OECD), developing significant new (Greenfield)
copper mining projects has become a serious challenge as stricter
regulations, environmental concerns, and an inability to accurately predict
capital expenditures (Capex) prohibitively increase project costs without
removing the risk of significant political opposition...” Kitco
"National governments are no longer the only, or even in many
cases the primary, source of political risk in mining projects. Political
risk can stem from local governments, international and local NGOs, community
groups, local competitors or any other group advancing political objectives.
Similarly, the types of issues that mining companies have to deal with are
quite varied. These range from having to deal with things like corruption,
NGO scrutiny, maintaining a social license to operate, a lack of clarity over
the implementation of mining legislation through to poor infrastructure and
HIV/AIDS." ~ Ben Cattaneo, Managing political risk in mining
The move out of "safe haven" countries has exposed investors to
a lot of additional risk.
Demand and supply growth
Global copper demand and supply
growth rates from 2007 to 2015 ststista.com
Global copper consumption from 2010
to 2016 (in 1,000 metric tons) statista.com
Escondida produced over 1.1 million tonnes of copper in 2014. Yet the
above chart, from Melbourne-based and Hong Kong-listed MMG, shows an
expected production drop from Escondida to 800,000 tonnes in 2017. The
expected production shortfall from Grasberg, in Indonesia, is equaling
frightening.
“Peru has been the favoured destination for copper investment in
recent years.
New mines coming on stream in the country in the following months and
2016 will double production to 2.8 million tonnes, placing the country in
second place globally behind Chile.
According to data from the Peruvian Institute of Economics, however,
social conflicts and red tape are making that goal difficult, as they have
already caused the delay of $21.5 billion worth of mining projects in recent
years.
Meanwhile the Apurimac region, near the Las Bambas Project, continues
to be under martial law following last months unrest (four dead and 16
seriously injured – Rick). During such period, civil liberties including
freedom of association and movement are restricted, while police are allowed
to enter houses without search warrants.” MMG’s gigantic Las Bambas mine
in Peru to open next year despite protests, Mining.com
Of the largest 28 copper mines in the world, 21 are not expandable.
Going Solar
“China's installed solar energy capacity is set to soar to 200
gigawatts (GW) by 2020 from around 36 GW in 2015, according to projections
from China's Renewable Energy Industry Association. Minerals consultancy CRU
estimates 6,000 tonnes of copper is used per GW of capacity.
Wind power is projected to reach 250 GW by 2020, according to industry
estimates. About 3,850 tonnes of copper is used per GW of wind capacity,
according to an average of industry estimates compiled by Reuters.
These, alongside a steady increase in demand from China's electric
vehicle sector of around 200,000 tonnes over the next five years, account for
more than 2 million tonnes of copper, compared with current forecasts on
total copper consumption over the period of about 105 million tonnes.”China
push into solar, wind power to heat up global copper markets, Melanie Burton
Reuters
The U.S. Energy Information Administration (EIA) says; "Future
demand for solar photovoltaics will be affected by major countries' goals for
installed solar capacity. More than 50 countries have established national
solar targets, amounting to more than 350GW by the year 2020. The current top
six countries in terms of total installed solar capacity – Germany, Italy,
Japan, Spain, France, and China – represented 76 per cent of installed
capacity in 2012, but only 61 per cent of the global target total for 2020.
Reaching 350GW by 2020 would require average annual installments of 40GW from
2013 through 2020, which is equivalent to manufacturing production in 2013
and well within current PV manufacturing capability of 60GW per year."
Minerals consultancy CRU estimates 6,000 tonnes of copper is used per GW
of installed solar energy capacity. 350 GW by 2020 use is - just for solar,
not wind, not electric cars - 2.1 mil lbs of copper. That’s the entire annual
2014 production of two Escondida’s.
A study by Wood Mackenzie found that there will be a 10 million tonne
supply deficit by 2028. That’s equal to the annual production of the world’s
biggest copper mine multiplied by 12.50 at MMG’s forecast 2017 production
figures for Escondida.
The world’s copper miners are cutting back production and massively
curtailing exploration/development…
Houston we have a problem…
Visualcapitalist.com
Visualcapitalist.com
“In terms of copper the current weak copper price is largely because
there has been something of a hiatus in Chinese copper purchases in line with
something of a downturn in the Chinese economic growth. Note this is
not a recession in the economy, but a downturn in the levels of growth seen
in the recent past. The Chinese economy still seems to be growing, but
at a slower rate (6.9% economic growth as of Oct 1st 2015 versus historic 9%
– Rick). The analyst bandwagon has seized on the slowdown as showing that
the supercycle, primarily generated by Chinese demand for industrial metals
of all kinds, has thus ended. The copper article stems from analysis by
senior Bernstein analyst, Paul Gait, that in fact the Chinese generated
supercycle is only around one-third into its course and the Asian dragon
still has a huge amount of ground to make up on all other
industrialised nations in terms of per capita metal consumption (and then
comes India and Africa – Rick).
In turn the recent slowdown in Chinese economic growth has seen metal
prices fall to production costs only now being just about covered by income
from sales, whereas traditionally the copper mining sector operates on the
basis of a 50% premium of sales to costs. As a consequence the big copper
miners are cutting back heavily on costs, leading to a drastic fall in
exploration expenditures, curtailment and cancellation of big new capital
projects and expansions and some closures of now uneconomic existing mining
operations to satisfy shareholder and institutional demands for profit
maintenance, or at least recovery.
But, at the same time many of the major producing mines are seeing
mill head grades running substantially above reserve grades which can only
lead to declining output, without major plant expansions to counterbalance
the trend. And finance for such major expansions is becoming more and
more difficult to come by. With exploration curtailed, and nowadays
huge lead times in taking a major new mine from discovery to production
(figures of 30 years are being quoted) the world is facing a major copper
shortage in the years ahead.” Copper and gold – parallels in massive
supply deficit scenarios, Lawrie Williams, lawrieongold.com
Consider the following facts:
- The low-hanging mineral fruit has been picked
- Metallurgy is becoming more complicated
- We are using more and more energy to achieve the same
amount of production. When does one unit of cost in, not give you the
two out you need?
- There is no substitute for many metals except other
metals - plastic piping is one exception
- There hasn't been a new technology shift in mining for
decades - heap leach and open pit mining come to mind but they are both
decades old innovations
- Increasingly we will see falling average grades being
mined, mines becoming deeper, more remote and come with increased
political risk
- Labor shortages loom, baby boomers are starting to
retire en masse, and the resource-orientated talent pool is thinning out
- We're rushing headlong into shortages of resources and
the conflicts generated from a lack of security of supply
Mine production of many metals shows us a number of similarities:
- Slowing production and dwindling reserves at many of the
world's largest mines
- The pace of new elephant-sized discoveries has decreased
in the mining industry
- All the oz's or pounds are never recovered from a mine -
they simply becomes too expensive to recover
Conclusion
The world’s urban population is expected to nearly double in the next 30
years. Globally infrastructure is in need of major rebuilds measured in the
trillions of dollars worth of capital investment. Consider electrification of
the global transportation system, the growing move to solar and wind, that’s
millions of tonnes of additional copper use. Throw in aging mines, resource
nationalism and exploration cutbacks.
The market is not factoring in basic supply and demand elements. Copper
has been oversold, the market is already very tight and we are entering into
an era of copper supply deficits meaning there is no long term justification
for low prices.
In a report published in early October 2015, the International Copper
Study Group (ICSG) changed their April 2015 mindset. They are now saying that
there will be a 130,000 mt copper supply deficit in 2016 instead of the
previously forecast 230,000 mt surplus.
The ICSG also reduced its 2015 estimated 360,000 mt surplus to just 41,000
mt.
Let’s leave the last word to Commerzbank, who, in a note to their clients
said; “The appraisal of the ICSG would justify significantly higher
copper prices." Indeed.
Is the supply, and price, of copper and a couple of copper focused junior
resource companies, on your radar screen?
If not, they all should be.
Richard lives with his family on a 160 acre ranch in northern British
Columbia. He invests in the resource and biotechnology/pharmaceutical sectors
and is the owner of Aheadoftheherd.com. His articles have been published on
over 400 websites, including:
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