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Recent
angst among analysts, pundits, mavens, gurus, savants, wizards,
and other assorted talking heads has China plummeting toward a “hard landing”. These
views in combination with the on-going
and never-ending worry
over the Euro, the currency without
a country, have weighed heavily on the entire resource market since the first of May.
Oil,
gold, and copper, the world’s
benchmark energy and metal
commodities, have shed roughly
10% of their unit values this
month. Most experts have adopted
a very bearish outlook to the point of jumping on the doom and gloom bandwagon and have not considered
these drops as simple market
corrections.
Not I, sayeth The Mercenary Geologist.
My current opinion is best illustrated by the 2011
supply and demand fundamentals of Dr. Copper, Ph.D.
Economics:
·
Mine supply:
16.0 million tonnes of copper.
·
World production: 19.7 million tonnes
of copper, including secondary refined scrap.
·
World usage: 22.1 million tonnes, including recycled scrap. ^
Ergo, we used
6.1 million more tonnes of copper than we mined
last year.
This chart shows the annualized 4% growth of copper supply since the widespread advent of electricity in industrialized countries starting
in 1900. The steeper growth curve beginning in the mid-1990s can be attributed to emerging market countries, mainly in Asia, demanding electricity for their massive populations. Also
note the increasing role
of cheaply processed oxide copper by acid leach, solvent
extraction, and electrowinning versus concentrated and refined sulfide copper:
World copper production was dominated by Chile and the
United States for several decades.
Chilean mines still supply about 35% and the USA remains
a large producer, but increasing
contributions have come from Peru,
China, and Indonesia over the past
two decades. Zambia and the Congo have the world’s
richest copper deposits; however, geopolitical problems continue
to severely hamper mine development in southern Africa:
World
Copper Mine Production (000s Tonnes) Source: ICSG
There was a significant
shift in the location of copper refineries
to Asia beginning in the
1980s as aging smelters were retired in the United
States and its domestic
production became dominated
by oxide copper deposits. Especially noteworthy has been the steadily
increasing capacity of
China, now refining over twice the sulfide copper of its closest competitors, Japan and Chile:
World Primary Copper Refinery
Production (000s Tonnes) Source: ICSG
Breakdown of total refined copper production illustrates steady growth and the increasing roles of oxide copper and refined scrap since the mid-1970s:
World Total Refined Copper Production (000s Tonnes) Source: ICSG
World demand for copper is closely
correlated to population growth.
Rising GDPs and demand from emerging
market countries, mainly
the BIICs (Brazil, India, Indonesia, and China)
are significant contributors
to the rapid growth in
world per capita use since the mid-1990s:
Source:
ICSG
Here’s
a breakdown by country of the 22.1 million tonnes of copper
used in 2009. Note that the Chinese used 36% of world demand, and that was only
slightly less copper per year (7.9 million
tonnes) than the Americas,
Europe, and Japan combined
(8.0 million tonnes):
2009 Copper Usage
Source: ICGS
Over the past four years copper has been in a delicate supply
and demand balance:
Copper
Production, Consumption, and Balance in Millions of
Tonnes
World mine production accounted
for about 16.5 million tonnes of copper in 2011. Folks, that’s a whole lotta love
for the red metal. However, as often pointed out by fellow geo-analyst Brent Cook, it’s
only slightly less than what
has come out of this big hole in the ground over the past 150 years:
Bingham
Canyon Copper Mine, Ophir Mountains, Utah
For those unfamiliar,
Bingham Canyon has produced
continuously since 1863
and became the world’s
first large-scale, open-pit
copper mine in1906. It is
mankind’s largest
excavation at 1.2 km deep
and 4.0 km wide and is
visible with the naked eye from outer
space.
Over this humongous
mine’s lifetime, it has produced 17.5 million
tonnes of copper, 26 million ounces
of gold, 220 million ounces of silver,
and over 1.1 billion pounds of molybdenum. The
value of its extracted resources exceeds those of the California Gold, Comstock Lode, and Klondike
Gold Rushes combined. Immense reserves
and resources are known both below and surrounding the current open-pit mine and are sufficient for
operations to continue for many
more decades.
The world is using
about one Bingham Canyon worth
of copper every year. Our demand budget has to be replaced every
year by new prospects discovered,
deposits found, reserves proven, and mines developed. This is indeed a formidable task as I discussed earlier this year (Mercenary
Musing, January 30, 2012), because most of the easily exploited surface deposits of copper
were discovered long ago.
For
many decades now, explorationists have employed indirect surface geology
clues, subsurface geophysics,
geochemical and biochemical
sampling, and remote sensing to target and discover new economic deposits of copper that do not crop out. The increased in exploration over the past
eight years has resulted in discovery of major
new resources. However, geopolitical instability, government bureaucracy, environmental opposition, permitting
delays, and threats of nationalization have produced
long lead times to development and mining, hindering primary market supply.
Geologists and engineers are
not finding, developing,
and mining enough copper to meet the historically- validated
projections of 4% demand growth
year over year. The world
uses five to six million more tonnes of copper than it mines every year. This steadily growing shortfall has been offset by refining
of secondary supplies and recently,
significant recycling of old scrap.
All
the above data and charts
emphasize the current
dominance of world copper markets
by China. It is apparent that
if the Chinese economy
tanks, you can throw my analysis
out the door for the short- to mid-term.
However, I take a longer term and perhaps contrarian view, largely because copper is essential to transmit electricity.
According to Scientific
American, 130 years after
Thomas Edison invented the light bulb, 25% of the world’s population (i.e., 1.7 billion people) still grope in the dark without it.
Most
of the world’s future demand
increases will come from the rapidly growing middle classes in BIIC countries who desire electricity
and modern conveniences that
we consider essential in
the developed world.
So
shy of a complete global economic meltdown or a catastrophic natural disaster, long-term supply and demand fundamentals remain strong and that certainly bodes well for a robust and healthy Dr. Copper.
In
a musing next week, I will address the short-term outlook for copper markets.
Viva el cobre!
Ciao
for now,
Mickey
Fulp
The
Mercenary Geologist
Miningcompanyreport.com
The Mercenary Geologist Michael S. “Mickey” Fulp
is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor
from the University of Tulsa, and M.Sc. Geology from the University of New
Mexico. Mickey has 30 years experience as an
exploration geologist searching for economic deposits of base and precious
metals, industrial minerals, coal, uranium, and water in North and South
America and China.
Mickey has worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for the past 22
years, specializing in geological mapping and property evaluation. In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient and is bilingual in English and Spanish. From 2003
to 2006, Mickey made four outcrop ore discoveries in Peru, Nevada, Chile, and
British Columbia.
Mickey is well known throughout the mining and exploration community for his
ongoing work as an analyst for public and private companies, investment
funds, newsletter and website writers, private investors, and brokers.
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