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Welcome to the Copper Thrust

February 29, 2012 by · Leave a Comment 

GUEST COMMENTARY–Rockstone Research–

China is the largest copper consumer in the world demanding 40% of the world`s copper supply. The copper price rose as much as 17% this year – despite copper stocks in Shanghai warehouses increasing steadily since quite some time and last week hitting its highest level in nearly a decade. The recent copper price increase is broadly being reasoned with „hopes“ that demand from China will pick up after the Chinese Lunar New Year in January. However, preliminary data suggests that China`s new export orders shrank in February instead of picking up as „expected“.

 

“Compared to past years, it is evident that an upward price trend at the beginning of the year is not the rule. So what is behind this year’s price increase? There is obviously a consensus that we will see a production deficit with an imbalance in the copper market in 2012 as well, despite expectations of subdued copper demand. The jury is still out when it comes to demand, even though it is still low at the moment. Although China’s copper imports rose by 13.8 % to 413,964 t in January compared to the corresponding prior-year value, they decreased compared to the December high of 509,000 t. Furthermore, Chinese copper demand has waned in the last two weeks, which is apparent in the declining premiums in spot business. At 217,142 t, copper inventories at the SHFE have reached the highest level since August 2002, and quantities have increased in Chinese bonded warehouses as well. This is due to extensive deliveries from LME inventories during the past few weeks and, since the SHFE prices are once again considerably below the LME prices, the arbitrage window, which has closed again. All of this should be viewed as temporary, however. The second quarter of a year is considered to be demand intensive, so a decrease in local inventories can be expected starting in March. This applies all the more since negative arbitrage may initially lead to lower copper imports. Moreover, China has just communicated that it will not allow a significant decline in growth. After the weak exports of goods in January, the Chinese Central Bank reduced the reserve ratio last weekend already, which may provide the Chinese economy with a distinct growth impulse. In Europe and the USA, the most recent economic and mood indicators and political crisis management measures have eased and stabilised the situation. In many cases, industry’s view is already directed towards later in the year. It can thus be observed in Europe that buying interest for cathodes increases when prices decrease, especially since the copper volumes in European LME warehouses are very low at 37,000 t. Some processers are also depending more strongly on spot purchases, as only lower quantities have been secured for the longer term.” (Aurubis AG: “Copper Mail No. 94”; February 21, 2012; the German Aurubis AG is Europe`s biggest copper producer)

 

With seasonal demand picking up soon in China and liqudity now being pumped into the Chinese system, the copper price is poised to even further advance in price in the upcoming weeks and months – especially against the background of having appreciated that strongly since the end of 2011 despite negative “statistics” and broadly promoted “expectations”.

 

“Copper is one of the best performing commodities so far this year having gained 10 percent, although investors are finding fewer reasons to stretch the rally with the European economy heading back into recession and manufacturing activity in top copper user China continuing to shrink”, Reuters commented last Friday, continuing as follows: While Chinese physical buying interest for copper has been largely slack since after the Lunar New Year break in January,analysts say China's demand will likely stay firm this year, particularly because of its electrification project which comprises about 40 percent of domestic copper consumption. "This will buttress demand in the event of a downturn because it's a cyclical state investment plan in China that transcends the short-term economic cycle," said Matt Fusarelli, analyst at AME Group. Key manufacturing data from China next week should provide further clues into the depth of demand from Asia, whose purchases have mostly disappointed in the weeks following their Lunar New Year holiday. But the LME copper market is reflecting a lack of nearby supply, with cash copper soaring to a $28 premium against three-month prices, from a $15 discount last week - its biggest move in a year. "It strikes me as the market anticipating some sort of shortage. We expect there to be substantial deficit in the copper market this year, in the region of 280,000 tonnes. The only reason you didn't see that kind of deficit last year is because there was substantial destocking in China. It will be interesting to see how any kind of anticipation of physical shortages by the LME market will square with what the reality is on the ground in China where it does not look like there is any strength in demand just yet", Nic Brown, Head of Commodity Research at Natixis, said. Traders questioned whether the tightness was a bullish indicator or a result of technical factors such as short covering, given the lack of demand from China. (See Reuters: “Copper surges to biggest weekly gain in a month”, and “Copper struggles as economic woes drag”; both February 24, 2012)


“Due to the Chinese relentless economic boom the copper industry here is projected to remain strong and dynamically developing. As demand is expected to proceed growing, the copper market is expected to witness vast deficit of the material worldwide, which has already demonstrated some traits at the end of 2011. The copper output at the global level is out of the scope to meet the expanding demand from emerging economies”, PRWeb commented last Friday in an article titled “Copper market expected to witness deficit worldwide according to Merchant Research & Consulting Ltd”.

 

Frik Els from Mining.com supplied the following commentary last Thursday:

 

“The International Copper Study Group’s data for November 2011 show a global copper production deficit of 119,000 metric tonnes after a significant jump in Chinese imports and usage. China’s net imports in October-November were 59% higher than over the same period in 2010 according to the group’s February 2012 Copper Bulletin. During the first eleven months of 2011, global usage grew by only 2.7% over 2010, but accelerated in October-November to 12% due to a jump of 38% in China. In comparison to China growth in the rest of the world was aneamic. The preliminary report shows in Europe, Japan and the US, usage declined as the year progressed ending down 4% in Japan and unchanged in the EU and in the United States. The copper mining industry continued to produce below capacity according to ICSG and in the 11-month period remained flat compared to last year. Concentrate production declined by 0.5% and solvent extraction-electrowinning (SX-EW) grew by 2.8%. Output in Chile, Peru and the US that combined accounts for almost 50% of the global production, was down by 2.8% compared to last year, while world number two copper miner China boosted output 12%. The ICSG reports shows mine production increased by 6.5% in Africa, 3% in Europe, 12% in North America and 7% in Oceania while it shrunk 3.5% in South America and 5% in Asia largely on the back of labour unrest at Indonesia’s massive Grasberg mine. “The average mine capacity utilization rate for the first eleven months of 2011 fell to 78.5% from 80% in the same period of 2010,” says the report. During the first eleven months of 2011 world refined production grew by 3.2% with huge variances in regional performance: “Primary production increased by 2% and secondary production (from scrap) increased by 9%. Production increases of 16% in Australia (recovery from 2010 operational constraints), 15% in China, and 38% in the Democratic Republic of Congo were partially offset by declines in Chile (4.5%), the United Sates (7%), Canada (15%), and Japan (15%).”

 

“Distinctions must be made with respect to copper production. On the mine side, many factors argue in favour of a considerable quantity increase during the coming years following the disruptions of production year 2011. The ICSG expects accumulated growth of 30.5 % in the production capacities for copper concentrates until 2015 with average growth of 6.9 % per year. Because of the start-up of new projects and the expansion and reactivation of existing mines, Barclays predicts a 3 % rise in 2012 compared to the prior year. BHP Billiton and Rio Tinto are investing billions in copper mining in their Escondida mine and want to increase the annual output from 990,000 t to more than 1.3 million t by June 2015. In contrast to mine output, the output of refined copper is expected to remain weak in 2012 with low capacity utilisation levels, most recently 80 %, despite the 3.7 % average annual growth in smelter capacities. There were already production cancellations at two smelters in Japan and the Philippines in January due to technical disruptions.” (Aurubis AG: “Copper Mail No. 94”; February 21, 2012)

 

Tom Albanese, CEO of Rio Tinto PLC  – the 3rd largest mining company in the world and one of the biggest suppliers of copper – anticipates as well that the copper price will remain strong in the mid-to long-term. Just one year ago, in an interview with the Australian Broadcasting Corporation, Mr. Albanese forecasted that mine-supply will continue to drag behind demand – due to significantly decreasing ore grades and increasing production costs at all major copper mines worldwide (incl. Rio Tinto). Solely new copper mines would be able to bring the increasingly widening deficit towards equilibrium over the next years, Mr. Albanese said but admitted that the strongly increased prices will push the development of new copper mines, as being the case with Rio Tinto´s own Oyu-Tolgoi-Deposit in Mongolia, besides other projects on the American and Australian continent. Yet at the same breath he amplified that no new mines will be brought into production in 2011 and 2012 to have a clue of a chance to significantly change the huge deficit as it takes many years to develop a deposit towards a mining operation. Mr. Albanese expects over the long-term – the next 15-20 years – that the industrial demand for copper will more than double from 2010 levels.

 

 

Nonetheless, one of the most remarkable copper discovery and mine development of the last few years was the “Superpit” in British Columbia (Canada) owned by Copper Mountain Mining Corp. (TSX-Symbol: CUM). With an average mineralization of “only” 0.3% Cu, this porphyry copper deposit has been brought into production in September 2011 (resource >5 billion pounds copper). For the first 12 years, the mine is anticipated to produce around 100 million pounds of copper per year. Mitsubishi took over 25% of Copper Mountain (market cap: $528 million).

 

One of the companies we follow closely and have initiated coverage on is Anglo Canadian Mining Corp. (TSX-Symbol: URA), because actively drilling their fully owned Princeton property which borders the south of the Copper Mountain Mine. The first ever drilling by the company at its “Combination Zone” (immediately south of the Copper Mountain claims) in late 2010 showed 0.7% Cu over 21 m at a depth of only 106 m (hole #6) and in late 2011, hole #21 returned 0.6% Cu over 38 m at a similar depth of only 108 m. Hole #6 was drilled vertical (-90°), whereas the most recent press-release (February 7, 2012) commented as follows:

 “Discussions with Copper Mountain staff have led to the decision to drill future holes at minus 50 degrees, generally north, toward the Copper Mountain intrusive/Nicola volcanic contact. Most historic drilling by the company has been vertical.”

 

Click here to view the latest analyst coverage on URA (30 Jan, 2012) including a general article on “Porphyry Copper Deposits in the Course of Time”.

 

Taking the copper price since 1985 into perspective, it strikes the eye that between 1987 and 2002 it was dominated by the red-blue triangle. The final movement of a triangle is called “thrust” – a strong and longer-termed up- or downward trend. After the thrust seemed to start in 2002 at around $0.75/lb, it hit the $4-level 4 years later in early 2006. Therafter, the price moved sideways within the boundaries of another red-blue triangle, whereas the price dropped quickly from approx. $4 to $1.25 in 2008.

 

 

In retrospect, this price drop is defined as a “classical pullback” to the first red-blue triangle respectively the yellow trendline – which means that it was only thereafter that the final thrust to the upside commenced being still active. On the other hand, the 2008 price “crash” can also be defined as a “fake breakout” to the downside as a fast rebound back into the triangle was accomplished thereafter. In 2010, the price did a “breakout” from approx. $3.25 to $4.50, whereafter a “classical pullback” followed. As the price has started to move up since then, a thrust to the upside has begun with the goal of breaking above the high of the “breakout” ($4.50) in order for a new and longer-termed upward-trend to start. Thus, a strong buy-signal is active since then, whereas a first sell-signal is given when breaching the yellow and green supports at approx. $3.75 resp. $3.50.

 

China is the largest copper consumer in the world demanding 40% of the world`s copper supply. The copper price rose as much as 17% this year – despite copper stocks in Shanghai warehouses increasing steadily for quite some time and last week hitting the highest level in nearly a decade. The recent copper price increase is broadly being reasoned with “hopes“ that demand from China will pick up after the Chinese Lunar New Year in January. However, preliminary data suggests that China`s new export orders shrank in February instead of picking up as “expected“.

“Compared to past years, it is evident that an upward price trend at the beginning of the year is not the rule. So what is behind this year’s price increase? There is obviously a consensus that we will see a production deficit with an imbalance in the copper market in 2012 as well, despite expectations of subdued copper demand. The jury is still out when it comes to demand, even though it is still low at the moment. Although China’s copper imports rose by 13.8 % to 413,964 t in January compared to the corresponding prior-year value, they decreased compared to the December high of 509,000 t. Furthermore, Chinese copper demand has waned in the last two weeks, which is apparent in the declining premiums in spot business. At 217,142 t, copper inventories at the SHFE have reached the highest level since August 2002, and quantities have increased in Chinese bonded warehouses as well. This is due to extensive deliveries from LME inventories during the past few weeks and, since the SHFE prices are once again considerably below the LME prices, the arbitrage window, which has closed again. All of this should be viewed as temporary, however. The second quarter of a year is considered to be demand intensive, so a decrease in local inventories can be expected starting in March. This applies all the more since negative arbitrage may initially lead to lower copper imports. Moreover, China has just communicated that it will not allow a significant decline in growth. After the weak exports of goods in January, the Chinese Central Bank reduced the reserve ratio last weekend already, which may provide the Chinese economy with a distinct growth impulse. In Europe and the USA, the most recent economic and mood indicators and political crisis management measures have eased and stabilised the situation. In many cases, industry’s view is already directed towards later in the year. It can thus be observed in Europe that buying interest for cathodes increases when prices decrease, especially since the copper volumes in European LME warehouses are very low at 37,000 t. Some processers are also depending more strongly on spot purchases, as only lower quantities have been secured for the longer term.” (Aurubis
AG: “Copper Mail No. 94”; February 21, 2012; the German Aurubis AG is Europe`s biggest copper producer)

With seasonal demand picking up soon in China and liqudity now being pumped into the Chinese system, the copper price is poised to even further advance in price in the upcoming weeks and months – especially against the background of having appreciated that strongly since the end of 2011 despite negative “statistics” and broadly promoted “expectations”.

“Copper is one of the best performing commodities so far this year having gained 10%, although investors are finding fewer reasons to stretch the rally with the European economy heading back into recession and manufacturing activity in top copper user China continuing to shrink”, Reuters commented last Friday, continuing as follows: While Chinese physical buying interest for copper has been largely slack since after the Lunar New Year break in January, analysts say China’s demand will likely stay firm this year, particularly because of its electrification project which comprises about 40 percent of domestic copper consumption. “This will buttress demand in the event of a downturn because it’s a cyclical state investment plan in China that transcends the short-term economic cycle,” said Matt Fusarelli, analyst at AME Group. Key manufacturing data from China next week should provide further clues into the depth of demand from Asia, whose purchases have mostly disappointed in the weeks following their Lunar New Year holiday. But the LME copper market is reflecting a lack of nearby supply, with cash copper soaring to a $28 premium against three-month prices, from a $15 discount last week – its biggest move in a year. “It strikes me as the market anticipating some sort of shortage. We expect there to be substantial deficit in the copper market this year, in the region of 280,000 tonnes. The only reason you didn’t see that kind of deficit last year is because there was substantial destocking in China. It will be interesting to see how any kind of anticipation of physical shortages by the LME market will square with what the reality is on the ground in China where it does not look like there is any strength in demand just yet.” Nic Brown, head of commodity research at Natixis, said. Traders questioned whether the tightness was a bullish indicator or a result of technical factors such as short covering, given the lack of demand from China. (See Reuters: “Copper surges to biggest weekly gain in a month”, and “Copper struggles as economic woes drag”; both February 24, 2012.)

“Due to the Chinese relentless economic boom the copper industry here is projected to remain strong and dynamically developing. As demand is expected to proceed growing, the copper market is expected to witness vast deficit of the material worldwide, which has already demonstrated some traits at the end of 2011. The copper output at the global level is out of the scope to meet the expanding demand from emerging economies,” PRWeb commented last Friday in an article titled “Copper market expected to witness deficit worldwide according to Merchant Research & Consulting Ltd”.

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