Copper

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Copper's future bright despite rout
DateNovember 19, 2015 - 8:26AM

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Mark Mulligan
Senior markets and economy writer

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China's transition isn't all bad news for resource stocks. Photo: Paul Jones

Iron ore stocks might be out of favour at the moment, but investors should look at exposure to copper to capitalise on China's transition from heavy industry and exports to more consumer-driven growth, say a range of mining executives and portfolio investors.
They say while oversupply of iron ore to feed China's increasingly export-orientated steel mills is undermining the mineral's price, changes in the country's urbanisation program, coupled with development in India, should ultimately be good for copper producers.
"There's no question that now as we look at the Chinese economy, not everyone is rising on the same tide - we see it more on a sector base," Rio Tinto non-executive director Megan Clark said at the Bloomberg Summit in Sydney on Wednesday.
"The transition from manufacturing to the services, which has probably been a bit more bumpy than had been heralded by the government, is not the underpinning of infrastructure, which has been good for steel.
"But if you look at the long-term picture for copper, with urbanisation, the use of electricity - particularly renewable energy - you still see the demand growing there," she said.
Commodities rout
Her comments came on the day copper prices hit a six-year low and iron ore, too, dropped another 4.5 per cent to a fresh four-month low of $US45.58 a dry metric tonne.
The falls have as much to do with repricing because of the strength of the US dollar, but demand from China, by far the world's biggest consumer of raw materials is also a big factor.
BHP Billiton does not expect depressed copper prices to lift for at least the next three years, but is confident of a comeback around 2019, when the market should start to shift into a "total under-supply situation".
Resource stocks were by far the biggest losers on the Australian stock exchange on Wednesday, as jitters about the great Chinese transition continued to weigh on investor sentiment.
Few economists see a hard landing in China, but growth is cooling. 
Sector investors and executives at the Bloomberg seminar remain bearish on iron ore because of the resulting oversupply.
Copper, however, was singled out as a good investment, despite current price softness.
"People can go to China and see what they want to see," said former mining sector leader at EY and global consultant Mike Elliot.
"If you're bearish you can go to the second or third-tier cities that have ghost buildings.
"If you're bullish, you'll go to second- and third-tier cities that are underdeveloped for what urbanisation is going on," he said.
"The answer is probably somewhere in the middle."
Wealth spreading
He said as wealth in China spread and the middle class expanded, families would outgrow their state-built one-bedroom units and demand bigger, privately-built accommodation.
These would contain more wiring and appliances with copper than typical accommodation today, he said.
"That doesn't mean to say you'll have the same rate of steel demand that you had in the past," he said, "but what you'll start to see is more copper demand." 
The message chimes with comments this week by UBS's senior China economist Donna Kwok, who told the The Australian Financial Review that although growth in China was easing faster than expected, government stimulus to avoid a hard landing for the country involved urbanisation programs that would call on resource inputs.
The government was also committed to dealing with the country's huge property overhang, she said.
"In terms of policy levers China still has to pull, it is still going to be increasing infrastructure support and investment support," she said.
"Another lever that the government can also pull is property policy easing, which is much needed to digest excess inventory."
Kapstream Capital's chief investment officer Kumar Palghat agrees Chinese support for iron ore and other metals will not disappear.
"I find it hard to believe that China's modernisation is won and done," he said at the Bloomberg seminar.
"It's hard to believe that they're trying to move 200 million or 400 million people to the middle class in five or seven years, and that everything's finished.
"If you move around the country, you notice that infrastructure is changing - and this is happening in India as well, so it's still broadly positive," he said.
Despite this more upbeat sentiment, State Street Global Advisors' Asia-Pacific head of active quantitative equities Olivia Engel remains heavily underweight Australian mining stocks amid the commodities slump.
"If housing [in China] is stimulated, then that means underlying support for Australian resources companies," she said.
"With that in mind we have a small position in some major Australian miners in our portfolio - but it's only 3 per cent.
"So, we're dipping a toes in with resources, but we're not expecting them to be a major engine of growth for Australia," she said.
"Australia needs to find other ways of growing than getting more stuff out of the ground."

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Copper giant tackles smelting problems at ancient operations
DateNovember 25, 2015 - 9:25AM

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Atacama Desert in northern Chile. Photo: iStock

The top copper-producing nation is facing one its most important decisions in decades: invest billions to overhaul antiquated smelters or close them down and ship more unrefined material to Asia or Europe.
Chile, which supplies a third of the world's copper, has gathered ministers, executives, engineers and economists to devise a national smelting and refining policy that will be presented to President Michelle Bachelet next quarter. Talks begin as state-owned Codelco hunts for more savings in the biggest metal rout in seven years as China demand slows.
What the experts recommend will be a big deal for the seven existing smelters - five of which are state owned, with the other two belonging to Glencore and Anglo American - as well as for prospective suppliers and partners and the global copper trade. Inefficient and dirty technology combined with high energy costs have eroded margins at Chilean plants.
"We are analysing the possibility of making a major reshuffle in smelters and refineries - maybe shut some down and maybe do some new ones," Codelco chairman Oscar Landerretche said in an interview in Santiago last week. "We cannot live as if trends in the copper market are just exogenous."
Smelters in the country are "sort of a monument to the cold war," when compared with modern plants in France, Germany and Japan, Landerretche said. That comes after decades of under-investment and, more recently, rising costs. Now the prospect of an extended period of low metal prices has producers grappling to cut expenses.
"During the commodities super-cycle, technological development was a task left pending," Claudia Morales, vice president of BlackRock in Chile, said in an interview from Santiago. "In the low curve of the cycle, bottlenecks must be improved to add value, so it makes a lot of sense for Codelco to be doing this national smelter plan."
Chile's production mix - which includes the intermediate product known as concentrates, refining and smelting - probably won't change dramatically anytime soon, according to Dane Davis, a metals analyst at Barclays in New York. Any refining capacity reductions probably will be more to do with declines in mined output as prices slump, he said.
If Chile did decide to refine less and export more concentrates, China would be the logical destination after its buildup of refining capacity.
While pulling out of the smelting business is an option being discussed, Landerretche says doing so would create a processing bottleneck. Arsenic contained in much of the concentrates that Chile produces surpasses levels now accepted by Chinese plants and would have to be blended with cleaner material, which isn't feasible, he said.
Other options under discussion include overhauling existing plants or building new ones via joint ventures, the use of green-mining technologies such as solar-powered smelters or developing more facilities that use microorganisms to help extract copper.
"The name of the game in new technologies in smelting is scale," Landerretche said. "That means that maybe we have to make a major reshuffling of the industrial organisation of smelting in Chile and we have to be open to all options."

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Drought in Chile forcing copper production slowdown

• SCOTT PATTERSON
  
  
• THE WALL STREET JOURNAL
  
  
• NOVEMBER 27, 2015 9:01AM
  

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Chile’s Escondida copper mine — jointly owned by BHP and Rio.

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The future price of copper and the growth of companies that produce it could hinge on a single precious resource: water.

Mining the important industrial metal requires huge volumes of water to control dust and separate copper from the earth. But a seven-year drought enveloping Chile, the world’s largest producer, is forcing big mining companies to curb output and pitting them against small communities like this one high in the Andes.
Water-related production problems are one reason some analysts say copper prices aren’t likely to lose much more ground after falling nearly 20 per cent so far this year. Over the long term, they say, the price of copper could move higher as global production fails to keep pace with rising demand.
Anglo American of the UK has said water shortages could curb as much as 18,000 tonnes in annual production starting this year at its Los Bronces mine.
Freeport-McMoRan is scrambling to secure water supplies for its Morenci copper mine in Arizona — a state that accounts for a third of the company’s copper output.
And in Caimanes in Chile, a decadelong legal fight over water has unfolded between local farmers and Chilean mining company Antofagasta. The farmers say an Antofagasta tailings dam, used to create a reservoir for mine waste, has created a water shortage. Antofagasta says the drought is to blame.
A judge this year sided with the farmers and ordered Antofagasta to demolish the dam for the nearby Los Pelambres mine, which produces 2 per cent of the world’s copper. The mine is still operating as the company appeals.
“We will have to stop operating if the tailings dam can’t operate,” Antofagasta’s chief of mining, Ivan Arriagada, said in an interview.
Companies are scrambling to adapt.
Anglo-Australian mining companies BHP Billiton and Rio Tinto are building a $US3.4 billion desalination plant in Chile after warning that water shortfalls could crimp production at their jointly owned Escondida mine — the world’s largest, based in Chile’s Atacama region, home to the driest desert in the world.
Still, some analysts say water-related supply disruptions, declining ore grades — the ratio of pure copper to waste products — and slowing growth of new projects will push copper production into a deficit, where demand outstrips supply by the end of the decade.
CRU Group, which tracks commodity trends, expects copper prices to wane over the next year or two before rebounding in 2017 and topping $US6,000 a tonne by 2019, when it expects the market to tip into a deficit. That is below the metal’s record of $US10,000 a tonne reached in 2011 but still historically high.
The slowdown is expected to be the worst in Chile, which yields nearly six million tonnes of the industrial metal a year — more than triple the next biggest supplier, China, and a third of global output. The five largest copper mines in the world by output are located in Chile, with Los Pelambres coming in at No. 4, according to CRU Group.
Water shortages are adding to problems like high energy prices, labour costs that rival those in the US and a sharp decline in ore grades that is causing mining companies to think twice about starting new projects in the country.
After years of increases, Chile’s copper production in 2014 fell 30,000 tonnes from the previous year to 5.75 million tonnes, according to Cochilco, Chile’s state copper commission, as water constraints and poorer ore grades curbed output.
Cochilco said in a recent report on water consumption that it expects seawater consumption by Chilean copper mines to increase by 14 per cent a year by 2026, even as freshwater usage declines about 2 per cent a year.
A major uncertainty for copper prices is demand. Copper consumption in China, which uses more than 40 per cent of the world’s total, is uncertain. Jeffrey Currie, head of commodities research at Goldman Sachs Group, said in October that prices could fall an additional 20 per cent by the end of 2016, partly due to softening China demand.
Among the most dramatic examples of the water-resource issue is the dispute over the dam built for Los Pelambres, a flagship operation that accounts for more than 50 per cent of Antofagasta’s mining revenue.
“We had enough water for the whole town, the animals, the crops,” said Juan Tapia Bonilla, a local tree farmer. He added that the situation changed when Antofagasta built a dam in 2008. “This cut the water.”
The residents were also concerned about the safety of the dam in an area known for earthquakes. Their concerns were highlighted earlier this month when a tailings dam burst at a part-BHP owned Brazilian iron-ore mine, killing as many as 12 people and flooding a nearby village.
Antofagasta argues that a drought that began around the same year the dam opened is largely responsible for the region’s water problems. The company also says the dam was authorised after an environmental-impact study was approved by the Chilean government and that destroying it could send waste products flowing into the valley below.
Antofagasta says it stepped up its engagement with the community in Caimanes in August.
The opposition persists. Residents have waged a legal battle against the dam, launched hunger strikes and staged protests that have caused operational problems resulting in an estimated loss of 8,000 tonnes of copper.
Antofagasta said copper production in the first nine months of the year fell 11 per cent from a year ago, due in part to “community actions” at Los Pelambres.
Wall Street Journal