Resource World Magazine

46 www.resourceworld.com A P R I L / M A Y 2 0 1 6 i t always comes as a surprise to read and hear commentaries on commodities where oil, iron ore and copper are char- acterized as oversupplied markets within the same sentence. In the oil and iron ore com- modity markets, producers are deliberately increasing production despite the impact on price. Oil and iron fundamentals can hardly be compared to the copper market. (All fig- ures in US$) Copper supply fundamentals have not changed for the past decade. Grades at producing mines are decreasing, reserves are depleting and production targets are often missed due to factors such as strikes, weather, geotechnical problems, etc. New project outputs have been below expecta- tions, in terms of new supply timing and quantity; copper production is expected continue to behave this way, as explained below. It remains a systemic bias of our indus- try to over promise and under deliver. Secondary supply (scrap) is creating a "pseudo" demand in the current price environment as it is not available in the quantity required to maintain a balanced market, such that scrap buyers have to buy cathodes instead. When prices do increase, a temporary surge in scrap sup- ply is expected. Finally, inventories are low and will not be able to provide any sort of sustainable response to the supply deficit when it takes place. Copper demand fundamentals are mainly driven by the industrialization, electrification and urbanization of China. China's economic outlook gathered a nega- tive tone in 2015 and the discussion on slower growth echoed "end of the world- like" statements with regards to the copper market. I feel compelled to remind readers that although the rate of growth is decreas- ing, the base from which the growth is calculated is increasing and the nominal impact is that more copper will be needed in China year after year. China's copper demand is expected to be approximately 300,000 tonnes per year for the next decade. This represents one very large new mine every year for 15 years. oTher fAcTS To conSider in diScuSSing long TerM coPPer SuPPly Volatility is the new normal. Commodity markets have experienced higher volatility over the last 10 years than what existed in the 1980-2004 period. Volatility is driven by stocking and destocking cycles, shape of the cost curve, perceived or real changes in supply/demand and market sentiments. Higher volatility also attracts specula- tors…and speculators create additional volatility. Copper volatility has a long-term implication on supply because it increases profit margin risk and acts as a deterrent to investment into new supply. Bearish copper price forecasts often address the cost curve and point to the fact that a large proportion of copper production remains profitable even when price is in the low $2.00/lb. – almost 80% according to Macquarie Bank. The issue here is on the determination of what really represents the indus- try's cost curve. Data from a renowned research firm is often quoted as a refer- ence. We would point the readers to a presentation by Teck Resources where it was illustrated how third party research had underestimated cash costs by an average of 20% for the top 10 copper producers. Moreover, in order to measure the real margin squeeze experienced by producers, one should consider the all-in costs of production, including sustaining capital, overburden stripping, royalties and cash taxes. The investment capital required for each new tonne of annual copper production is now well above $20,000/tonne for new projects. This is due to the lack of infra- structure and the lower grade of these newer projects, compounded by cost infla- tion in certain aspects of project delivery. Finally, I want to discuss the copper mine supply projections. My post mortem analysis of these forecasts has demon- strated how overly optimistic they are. Bear in mind that I am far from criticizing the research from renowned consultancy firms; on the contrary, it fills a need and is worth the cost. But these are produced based on a set of constraints and assump- tions that are generally well described in the documents supporting the forecasts. In my opinion, the damage is done Copper outlook looks favourable Fundamentals falling into place for a recovery of the red metal by Guy Le Bel, Director, Golden Queen Mining Co. Ltd.

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