Copper Market Outlook 2015

COPPER MARKET OUTLOOK 2015

01/08/2015 1

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Frontiers Strategy Note: 01/08/2015

Copper market outlook 2015

Most analysts agree that rising supply and sluggish demand by China will keep pushing copper price downward. Price Waterhouse and Coopers (PwC) stated in its annual copper survey of 2014 that coppers current level is the result of a supply-demand imbalance, which some pre-dict will worsen in the months ahead.

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Most analysts agree that rising supply and sluggish demand by China will keep pushing cop-

per price downward. Price Waterhouse and Coopers (PwC) stated in its annual copper survey of

2014 that coppers current level is the result of a supply-demand imbalance, which some predict will

worsen in the months ahead.

The copper market continues to fight some strong downward pressure from increased supply, a

weaker demand growth outlook and strengthening US dollar value.

International Copper Study Group (ICSG) has reported in the latest forecast for 2015, that to-

tal mine production of copper would increase by 6.7% to 19.8 million tonnes, and the refined produc-

tion will surpass the refined usage by 531,000 tonnes.

Table 1. Copper demand and supply forecast for 2015

Source: International Copper Study Group


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Demand of copper

In the first six months of 2014 global copper demand has grown at an almost identical pace to

the 2013 average, but at a faster rate than a year earlier. This healthy increase of nearly 500 000

tonnes was split more diversely across the globe that a year ago. This was chiefly due to two coun-

teracting features, as the deceleration in Chinese growth was offset by improvement in the perfor-

mance of the mature economies.

Table 2. Global copper consumption

Consequently the increase in Chinese demand has accounted for 53% of global growth down

from 92%. US copper demand in the first half bolstered by auto sales and Japanese demand was

also up noticeably for the six months as a whole. In China demand has continued to grow at a

healthy rate, just shy of 6% year-on-year.


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Table 3. World copper supply and demand

PwC estimated that global demand growth is forecast to grow my 859,000 tonnes in 2014,

with significant contributions coming from the EU-28 at 114,000 tonnes and the US at 58,000

tonnes. Chinas demand growth is estimated only by 19,500 tonnes.

On the contrary, International Copper Study Group (latest estimated in Oct 2014) estimated

that world apparent copper demand is expected to exceed refined copper production by about

300,000 metric tonnes in 2014.

In 2015, however most of the analysts agree that in 2015, supply will be exceeded than de-

mand at least by 200,000 tonnes, therefore pressure on copper price will still exist in 2015.


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Copper demand of China

For Mongolia, China is the single important user of its copper concentrate export as well as

the biggest consumer of copper in the world. Therefore, we would like to discuss more in detail

about Chinese copper consuming market and its trend in 2015.

Overall, Chinese copper consumption has risen by 6% year-on-year in the first six months of

the year and, while substantially weaker that the growth rate in 2013. While 6% increase is less than

that seen in recent years, it is still very considerable for the copper market. This year, two areas,

which are vital for copper demand have been creaking even more, namely property and industry.

However against this backdrop some other sectors held up better. The brightest spot of Chinese

copper demand for the first half of the year was the transportation equipment sector, which grew

10% to 455,000 tonnes. Reuters is saying that prospect for auto demand is also promising. New

electric car sales have increased by 280% in first 7 months of 2014. Central and local government

initiatives to eliminate high polluting vehicles look set to ensure robust replacement demand.

Table 4. China copper consumption by end use

JPMorgan Chase & Co. predicts a 6.5% growth in Chinas copper demand next year. Also

Codelco estimates that Chinas refined copper demand will increase about 5 percent next year, simi-

lar to this years rate, even as the worlds second-largest economy is projected to grow at slowest

pace since 1990. Zhang Fengkui at the Ministry's nonferrous metals department told a conference in

Ningbo city that copper demand from the power, car and home appliance industries would continue

to push up consumption in China, the world's top copper consumer.

China added 50,000 tons per month of smelting capacity from April to July and will bring

online more than one million tons per year of new capacity in 2015, Goldman Sachs Group Inc. said

in a Sept. 17 report. Therefore, it can be expected that copper concentrate demand of China will in-

crease in 2015.

Also Shanghai metals markets copper analyst predicted that refined copper consumption of

China will reach 9.83 million tonnes in 2014, and will increase slightly to 9.97 million tonnes in 2015

at 2014 SMM China Metals Summit on Nov. 23-24. The power sector will remain the larg-

est copper consumption industry in China, she said at the summit in Shanghai.


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Another factor to push the demand of copper concentrate in 2015 is rising treatment and re-

fining charges (TC/TR). Jiangxi Copper and Freeport-McMoRan have reportedly determined 2015

term TC/RCs for copper concentrate at $107 per tonne and 10.7 /lb, 16% higher than those for

2014. SMM learns that some Chinese smelters plan to raise copper concentrate imports for 2015

delivery incentivized by the increased TC/RCs for term shipments. Pan Pacific, Japans biggest cop-

per smelter is seeking a near double digit increase in annual benchmark term for 2015 from $92/

tonne in 2014 to over $100/tonne.

In Japan, fourth biggest consumer of copper in the world and possibly new market for Mongo-

lian copper miners, copper demand was up almost by 10% in the first quarter of this year. However

due to the consumption tax hike sparked sharp slowdown in demand, overall for the first half of

2014, copper demand is higher, at a three-year high.

Mongolia has exported 4.7 thousand tonnes of copper concentrate to Japan on a trial basis in

October and November, with value of 12.8 million USD. The average export value of copper concen-

trate to Japan was 2743USD per tonne, higher than the value of export to China.

Supply/Copper mine production

ICSG suggest that total mine production of copper in 2015 will increase by 6.7% to 19.8 mil-

lion tonnes, while refined production of copper will increase by 4.3% to 23.1 million tonnes in 2015.

Copper in concentrate capacity is expected to reach 21.6 Mt/yr in 2017. Peru is projected to account

for 24% of the additional capacity from new mine projects and expansions through 2017, followed by

Zambia, Chile, Mexico, and the Democratic Republic of the Congo (DRC). Together these five coun-

tries will represent 56% of the world growth. Projects are also being developed in countries that cur-

rently do not mine copper, including Afghanistan, Ecuador, Fiji, Greece, Israel, Panama and Sudan.

By 2017, total expected copper production capacity from projects starting in the new copper mining

countries is around 150,000 t/yr, and capacity could continue to increase well above 1 Mt/yr in these

countries if projects planned beyond 2017 are developed.

Codelcos output and sales of refined copper will shrink five percent next year as the worlds

largest producer seeks billions of dollars to revive production, according to the companys top sales

manager. Shipments of copper cathode will decrease to all markets, including China, the worlds big-

gest consumer of the metal and buyer of more than 30 percent of Codelcos refined copper produc-

tion, Rodrigo Toro, corporate sales vice president, said in an interview. Imports by China, where

copper is used as an industrial material as well as a collateral for financing, will drop next year as

domestic smelters produce more refined metal amid rising global ore supplies, Toro said.

Mongolian copper concentrate export to China has sharply increased by 68.1% to 1.1 million

tonnes (99.8% of total export of copper concentrate) with value of 1.9 billion USD in the first ten

months of 2014. Average price of the copper concentrate exported was 1762USD per tonne, little

lower than Chinese average import price for 2014.


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According to the Chinese custom statistics, it imported 9.5 million tonnes of copper concen-

trates and ore in the first ten months in 2014, an 17.2% increase year-on-year in terms of volume,

while total value of imported copper concentrate or ore increased by only 11%. The average import

price of copper concentrate for China was 1833USD/per tonne for the first ten months of 2014.

Shanghai metals market, the leading metals information provider in China, informed in Dec 24

that the third largest copper producer of Japan, Mitsubishi Materials Corp, is looking for a long term

contract to extract copper from the OyuTolgoi mine. The company as well as the Mitsui and Co, the

trade house based in Japan has together signed a contract in order to extract copper from the Oyu-

Tolgoi, which allows both of the companies to export 5,000 metric tonnes copper ore from OyuTolgoi

mine in a trial basis. The General Manager of Mitsubishi's raw material division, Tatsuya Inoue, de-

clared the matter on the Tokyo based headquarters of the company. According to Inoue, Mitsui has

arranged the shipping of copper concentrates, which will be carried through the rail to Vladivostok,

the Russian Port, and then via ship to the Mitsubishi Materials, which is located in Naoshima plant,

in the Southern Shikoku Island in Japan. The shipping would reach Japan, within a time limit of 30

days, which is similar to Chile.

According to the Mongolian Economic Update published by the World Bank in December

2014, Mongolian copper miners planned to export 1.4 million tonnes of copper concentrate in 2015.

It has been estimated that the OT Company to export 819.1 thousand tonnes of copper concentrate

and Erdenet plant to export 590.1 thousand tonnes. This means that Mongolia will be exporting ap-

proximately 2.4% of world total mine production in 2015, and possibly over 10% of Chinese total im-

port of copper concentrate in 2015.

Value of copper concentrate export of Mongolia is expected to be accounted for 54% of the

total export, followed by coal with 28% according to the Mongolian Government budget plan for

2015. It is clear that economy of Mongolia will be highly dependent on the revenue from copper con-

centrate in 2015.

Copper price outlook for 2015

Copper prices will keep falling next year as a strengthening U.S. dollar and weaker oil prices

push down marginal production costs, according to Goldman Sachs Group Inc. The bank lowered its

2015 price outlook to $6,217 a metric ton from $6,400. Marginal production cost will fall to between

$5,600 and $6,300 a ton next year, according to the report. For commodity markets in balance or in

small surplus, prices tend to trade with or around the marginal operating cost of production. The

Goldman Sachs said prices could fall below its estimates to average $5,600 a ton if Chinas state

stockpiling agency stops buying copper. The State Reserve Bureau will buy 500,000 tons of refined

copper this year and 200,000 tons in 2015, supporting prices at around $6,200 to $6,300 a ton, ac-

cording to the bank. The U.S. dollars rise will reduce marginal costs of copper mine production as

83 percent of operating costs are in local producing-country currencies, the bank said in the re-

port. The bank lowered its six-month price forecast to $6,200 a ton from $6,600 and its 12-month

outlook to $6,000 a ton from $6,200.


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According to PwC, marginal production cost levels around $6200/tonne are also getting clos-

er to the price, with the cost-to-price comparison not including a return on capital.

Table 4. Summary of copper price outlook of 2015 (USD/per ton)

Summary

The copper market continues to fight some strong downward pressure from increased supply,

a weaker demand growth outlook and strengthening US dollar value.

Global copper demand will be supported strongly by the demand from advanced economies

such as US and EU, as demand for vehicles and copper related consumer products pick up. Chi-

nese property market still remains a real concern for the copper market. However power plant pro-

jects and increasing demand of vehicle might pull up the demand for copper. Most of the analyses

suggest that copper demand from China, main destination of Mongolian export of copper concen-

trate, will increase by 5-6% for 2015. Rising TC/RC will also pull the demand for copper concentrate

up.

From the supply side, most of the researches and analyses suggest that supply growth will

outpace the demand growth and copper supply surplus is expected to be around 300 000-450 000

in 2015. However some producers and researchers, such as Glencore and Wood Mackenzie sees

this surplus might not be materialize in 2015 due to the frequent mining disruptions of the industry.

The copper price could be settled between 6200 to 6500 USD/tonne in 2015, which is not so strong, however many experts believe that copper price will recover back from 2017. As the price comes very close to the production cost, restructuring of cost will still be crucial for the producers in 2015.

It is clear that export revenue from copper concentrate keep playing in important role in the

macroeconomic performance of Mongolia, therefore the economy will still be quite sensitive to the

global copper market performance in 2015.

2014 2015F

Min Max Spot

price as

of 30

Dec

2014

PwC TD secu-

rities

World

Bank

Goldman

Sachs

Average

price

Estimated

price by

Mongolian

Government

Copper

price

607

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735

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6332.00 6854 6575 6451 6217 6524.25 6354.7

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Copper Market Outlook 2015

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