Copper’s long-term outlook
Previously, we saw that copper faces several headwinds in the short to medium term. However, copper’s long-term outlook looks much better compared to the near-term outlook. The reasoning is basically two-fold. First, copper demand could continue to grow at a modest pace for many years. While the Chinese steel demand likely peaked, the copper demand could continue to grow in China. Apparently, Chinese steel demand peaking is the biggest risk for the global steel industry. We’ll explore the outlook for the steel industry in the coming parts of this series.
The above graph shows copper’s end consumption breakdown as estimated by the International Copper Study Group. Copper’s wide usage in consumer appliances like air conditioners bodes well for copper demand. Despite the global turbulence, consumer spending hasn’t faltered. Consumers from China to the US haven’t held back their purchases despite all of the negative sentiment generated by the stock market volatility.
On the supply side, copper’s dynamics are different from some of the other metals. Copper mining is capital intensive. Miners need to replenish their falling reserves with new mines. Also, copper mines have to be converted into underground operations once the open pit mining nears its life. These activities require a lot of cash.
Some of the world’s largest mines have seen falling ore grades. BHP Billiton (BHP) owned Escondida. This is an example where falling ore grades negatively impacted copper volumes. Also, some of the other big mines like Freeport-McMoRan’s (FCX) Grasberg mine in Indonesia (EIDO) need to be converted to underground operations in the next few years. Note that Rio Tinto (RIO) is also developing the Oyu Tolgoi (TRQ) mine in Mongolia. Rio Tinto is Freeport-McMoRan’s partner in the Grasberg mine.
In the next part, we’ll explore another recent development that shows copper’s strong long-term fundamentals.