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If you needed 50ml tonnes of copper over the next 5 years, and had very
little production of your own, what would you do?
I'm thinking you'd manipulate the market like crazy trying to get everyone
to believe there’s a huge surplus instead of a major deficit.
How would you do it? Well, we can look at the last time the Chinese
manipulated the copper market - they invited every analyst they could find
and invited them to China. Showed them all a few warehouses stacked with
copper to the roof. Why there was so much the ground was compacting said one
guy, another said the stacks were falling over like dominos. The world bought
the surplus story, swallowed it hook line and sinker. Headlines screamed ‘China
Has Enough Copper!’
Of course it wasn’t true, China needed copper, what they had (2ml tonnes),
was tied up in financing deals and at any one time there’s at least one
million tonnes in transport or somewhere in the process that’s tied up,
already spoken for, and not available.
And the world gets conned, every year 'experts' predict a surplus, instead
what happens? Deficit after supply deficit.
Let’s expose the con job.
Copper Consumption
China is going to grow at over 7% this year, that’s compounded on top of
the 7.3% it grew in 2014 and the year before etc. China is also spending huge
amounts of money on infrastructure, especially their power grid.
India, to become competitive, needs to modernize its power grid, so too
does Indonesia, they have to build all those smelters for in-country
benefaction of ore.
Africa has - by 2050 every 4th person in the world is going to be an
African - eight countries on that continent that have better growth rates
than China and India.
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, even a slight increase in
Chinese consumption will translate into enormous demand growth.
India, with its 1.2 billion people, is presently using 0.4 kg of copper
per person. The country is modernizing and needs to invest heavily in
electrical power infrastructure. According to the International Energy Agency
(IEA), India's power production will need to rise by up to 20 percent
annually to keep pace with its economic and population growth. Just meeting
the required power target would double India's annual copper consumption.
India's new government, led by Narendra Modi, is focusing on Asian
partners China and Japan for enhancing investments in infrastructure and
manufacturing. The growth model pursued by China and Japan – export oriented
manufacturing, heavy infrastructure building and urbanization - has become
India’s blueprint for pushing growth up to and beyond the 7 percent mark.
Population Growth
At this moment there are slightly over 7 billion people living on this
planet, an urbanization rate of 53 percent means there are roughly 3.71
billion urbanites in the world today. It has been estimated that by the year
2050 our global population will reach 10 billion people. If our global
population does indeed reach 10 billion people, and if Birch and Wachter’s
expected urbanization rate of 70 percent is achieved, seven billion people,
or almost the equal of today’s current world population will be considered
urban.
Could we hit the ten billion people mark? Could 70 percent of us be living
in cities by 2050? The answer is likely yes. Developing countries are
responsible for 90 per cent of current population growth – these are on
average very young people with many years of fertility/reproduction left to
them. By the year 2025, in just 10 short years, 84 per cent of the world’s
people will live in developing regions.
According to the World Health Organization (WHO) “Almost all urban
population growth in the next 30 years will occur in cities of developing
countries. Between 1995 and 2005, the urban population of developing
countries grew by an average of 1.2 million people per week, or around 165
000 people every day. By the middle of the 21st century, it is estimated that
the urban population of these counties will more than double, increasing from
2.5 billion in 2009 to almost 5.2 billion in 2050.”
The developing world’s urban centers are expected to burgeon, drawing 96
percent of the additional 1.4 billion people by 2030. Due to the overall
growing global population - but especially an exploding urban population
(urban populations consume much more food, energy, and durable goods than rural
populations) - demand for water, food, housing, heat, energy, clothing, and
consumer goods is going to increase at an astounding rate.
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–$20,000 per capita (2005 int$) as countries go through a period
of industrialization and infrastructure construction.
A few country’s stand out as well below the IMF’s $15,000.00:
- China – 9,233
- Indonesia – 4,956
- Philippines – 4,410
- India – 3,876 Pakistan – 2,891
- Pakistan – 2,891
Since they are still a considerable distance from the point where further
increases in GDP per capita no longer increase copper consumption per person,
China, Indonesia, the Philippines, India and Pakistan (and the other 113 out
of 180 countries listed below the IMF’s 15,000 Int$ cutoff) are likely to
continue to add significantly to global demand for copper for some time to
come.
Tomorrow’s Copper Demand
According to the Minerals Education Coalition every American born will
need 978 pounds of copper over their lifetime.
 
We can see in the above Wood MacKenzie, Macquarie Research graph, from an
August 2013 report, a projected refined shortage in 2018. The surplus
forecast between now and then is diminutive in relation to the sheer size of
the copper market and copper production often falls short of forecasts due to
accidents, strikes, ore degradation or power shortages. Disruptions in the
copper market averaged 900,000 tonnes of copper supply per year between 2004
and 2012.
We already have one billion people out of today’s current population
slated to become significant consumers by 2025.
Another 2.8 billion people will be added to the world between now and
2050. Most will not be Americans but they are going to want a lot of things
that we in the western developed world take for granted – electricity,
plumbing, appliances, AC etc.
“Infinite growth of material consumption in a finite world is an
impossibility.” E. F. Schumacher
“We’re living in a finite world, one in which resource constraints are
becoming increasingly binding.” Paul Krugman, ‘The Finite World’
Copper Parity
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? Here’s what each of them would need to consume, per year, to
live the American lifestyle…
In 2010, more than 38,000 pounds (19 tons) of minerals and fuels
were needed per person to maintain the American lifestyle.
Out of the 38,000 total pounds needed, 21,675 pounds were energy
fuels - the coal, petroleum, natural gas, uranium - required for
transportation and to heat, cool and light homes and businesses.
One billion new consumers by 2025. Can everyone who wants to, live an
American lifestyle? Can everyone everywhere else have everything we in North
America have? The answer is a resounding no!
If we mined every last discovered, and undiscovered, pound of land based
copper the expected 8.2 billion people in the developing world would only get
three quarters of the way towards copper use parity per capita with the U.S.
Of course the rest of us, the other 1.8 billion people expected to be on
this planet by 2050, aren’t going to be easing up, we’re still going to be
using copper at prestigious rates while our eastern cousins play catch up.
Copper use parity isn’t going to happen, it can’t.
“The data also show that nations such as South Africa and China will
need to increase their average urban per-capita copper stock-in-use by seven
or eight times to achieve the same level of services as the developed
countries if they use existing technology.
Is there enough copper to meet this potential requirement?
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 sustainedworldwide
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
Despite what mainstream, swimming in the shallow end analysts say, copper
is already in a very real, structural supply deficit. Most just don’t know
it.
Lets state the obvious:
- For over the last twelve years supply has struggled to
keep pace with demand
- Metal supply is finite and subject to compounding demand
from developing nations
- Metal production is highly cyclical, with intermittent
peaks and troughs which are closely linked to economic cycles -
declining production has historically been driven by falling demand and
prices, not by scarcity
- Rates of production and amounts of reserves continually
change in response to movements in markets and technological advances
- Most mineral resources will not be exhausted in the near
future
- If energy was cheap and unlimited then recoverable
resources would be unlimited
But
- Discovery and development is increasingly becoming more
challenging and expensive
- Average ore grades are in decline for most minerals, yet
production has increased dramatically
- Our most important metals are suffering from declining
ore quality and rising extraction (ore is a different and inferior
chemical or structural composition) costs
- Our prosperity has always been based on the fact that
producing resources yielded more resources than it cost. However the
cost of *energy is climbing, the amount used is climbing but the returns
from energy expended is declining. Eventually the quantity of resources
used in the extraction process will be 100% of what is produced
- Most older existing mines, the foundation of our supply,
have increasing costs with production rates stagnating or even declining
- The rate of discovery is not keeping pace with the rate
of depletion, let alone being higher
*Energy can be thought of as a proxy for labor, materials, energy and
externalities – environmental, community impact etc.
Reserves
Each year, the U.S. Geological Survey (USGS) estimates the amounts of
reserves: the quantities of mineral that can be economically extracted or
produced at the time of determination.
World copper reserves are currently placed at around 630 Mt. When
considered as just a single consolidated global number copper reserves seem
large and adequate for several decades of production at 2012 levels.
Unfortunately most people do not take into consideration that these
reserves are made up of many separate deposits, each of which has to be
considered as a standalone and on its own merits.
The economic viability of the world’s copper deposits are influenced by
many factors that inevitably reduce the amount of copper that reaches
production.
These factors are:
- Location
- Capital and operating costs
- Market conditions
Each of these deposits is also subject to geologic, engineering,
environmental and political constraints that are always changing.
Many mines do not come online on time and the disruption rate, the amount
of promised copper that fails to materialize is now as high as 8 percent -
operating mines can suffer production stoppages/slowdowns or move into lower
grade ore.
A long term structural trend became evident in the industry in 2012 -
shortfalls in targeted production were characterized by a fall in grades and
recoveries rather than unexpected disruptions.
Consider
- Average capital and operating costs for copper
production capacity in new mines increased an average of 15% per year over
the past 20 years
- From 2001 to 2012, the weighted-average head grade at 47
producing mines with comparable data declined by almost 30%
- The average ore grades of copper in new discoveries and
developing projects is declining
- Significant deposits are now being found at greater
depths or in more remote areas
- Net of administrative costs, a mining company had an
average total cost to replace reserves and produce copper of more than
$3.30/lb in 2012
- The 22 major copper producers, based on 2012 production levels,
need to replace an average of at least 500,000 mt of copper reserves
each year
Chile produces a third of the world’s copper and has seen a seven fold
increase in energy costs over the last ten years. CRU estimates Chile’s
copper production costs have risen 60 percent over the last seven years
compared to a world average of 30 percent.
Chile is the world’s top copper producer but the country as a whole is
woefully short of power. The country’s power generation capacity currently
stands at 17,000 megawatts. It is estimated that the country will need at
least 30,000 megawatts of power by 2020 to keep up with the demand, the
increased demand coming primarily from mining projects. Unfortunately the
government only plans to add 8,000 megawatts between now and 2020 and there
is serious opposition to these plans from environmental groups who have, so
far, been wildly successful by suspending several key projects and more than
$22 billion worth of power investment. The Chilean Supreme Court recently
struck down the planned 2,100-megawatt, $5 billion Castilla thermoelectric
power plant project, citing environmental concerns.
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.
Chile’s copper production is in trouble, its ancient power grid is
breaking down, electricity supply to the north, already inadequate, is
threatened. No new mines, water is severely restricted and desalinization of
seawater is required.
Over the past seven years, forecasts for world mine copper production have
consistently exceeded actual production figures. An important take away from
the graph below would be the decline in production from existing mines and
how “Probable Projects” barely keep pace with expected consumption.
The chart below provides a graphic view of the decline in world
average copper grades since 1985, plus the declining grade forecasts based on
new mines under construction.
Source Brook Hunt
The metal content of copper ore has been falling since the mid 1990s. A
miner now has to dig up an extra 50 percent of ore to get the same amount of
copper. As grade drops the amount of rock that must be moved and processed
per tonne of produced copper rises dramatically – all the while using more
energy that costs several times more than it use to. With the lower grades of
ores now being mined energy becomes more and more of a factor when
considering economics.
Copper prices need to be significantly above marginal cost, in other
words, prices need to stay high enough to provide miners with an adequate
return on their investment for building today’s much more expensive
and riskier new mines. There is also a significant additional
cost in keeping production constant year over year.
If copper does not stay well above miners marginal costs the much needed
new mines will not be build.
Barclays said in February that the real expense of producing copper may be
as much as 87 percent higher than back in 2007 due to higher labor and energy
costs.
Rio Tinto says growth will continue to be a challenge for several reasons:
- An increasing proportion of potential new supply is
located in riskier countries.
- More challenging environments subject to a lack of
infrastructure imply an increase in the capital intensity of new
projects.
- Recent supply has continued to underperform with
decreasing grades and disruptions impacting production.
- Major causes of supply disruption will continue, these
causes being; Technical complexity, Project delays, Labor strike action
1m metric tonnes of new copper supply is required to be produced each year
to keep up with copper demand. The following chart graphically illustrates
how current projections for future copper production may be optimistic.
Source A. Gonzales
Resource Nationalism & Political Risk
Resource nationalism is the tendency of people and governments to assert
control, for strategic and economic reasons, over natural resources located
on their territory.
The major benefit for developing countries from natural resource
development comes in the form of:
- Employment/wage’s
- Government revenues – taxes, royalties or dividends
- There can also be indirect benefits such as knowledge
and technology transfers.
- Foreign investments, made for off-take agreements, can
also involve infrastructure investments, sometimes on a massive scale,
like electricity, water supplies, roads, railways, bridges and ports.
Two Examples
Indonesia’s President Yudhoyono prohibited ore exports from Southeast
Asia’s largest economy. He’s betting that investment and higher prices would
more than offset job cuts and lost revenue from unprocessed ore shipments.
Zambia is Africa’s largest copper producer (and wants to directly market
its copper), in second place is the DRC. The copper-belt which straddles
Zambia’s and the Democratic Republic of the Congo’s borders is being tied up
for internal development by the two countries.
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.
Conclusion
The world’s exploding population, the massive shift from rural to urban,
the growth of a very consumption minded middle class in developing countries,
it’s all happening now.
Add in finite, increasingly hard to source resources.
The effects will felt long before we actually start to run out of copper
and there will be severe consequences:
- Rising energy and commodity prices
- A decline in the global economy
- Civil unrest
Perhaps the biggest reason to get bullish on copper are the massive costs
and risks involved in finding and opening new mines in often geo-political
risky countries where a miners social license to operate is shaky at best.
What’s going on today regarding a loss of funding for junior exploration?
Being down plus 60% over the last two years does mean something for those
juniors able to survive and advance their projects to the point where a major
becomes interested.
Is the coming consequence of living in a finite world (and not believing
anything shallow swimming analysts say about copper surpluses), on your radar
screen?
If not, maybe it 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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Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or
the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources
he believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts
no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of Richard Mills only and are subject to
change without notice. Richard Mills assumes no warranty, liability or
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consequence of reliance upon any opinion or statement contained herein or any
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Furthermore, I, Richard Mills, assume no liability for any direct or
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