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Investor attitudes towards copper

and copper miners have changed

for the better since early 2009. This

improved sentiment, barring some

limited nearterm corrections, shouldcontinue to prevail in the marketplace

well into 2011, as the China-led global

recovery continues to firm materially,

the U.S. and Europe emerge from

recession and restocking commences

outside of China.

Massive government spending

commitments (totalling some US$2.2T

globally) in China (US$586B), the U.S.

(US$787B), Europe and elsewhere,

extremely low interest rates, a more

stable credit environment and record

Chinese commodity imports (associated

with restocking, lack of secondary

supply, and FX hedging) have all helpedto improve the global demand outlook 

for copper.

Supply/Demand BalanceExpected to TightenWith stronger demand prospects,

markets are anticipating tighter supply/

demand conditions going forward.

Investor attitudes towards the copper space have changed for the better sinceearly 2009.

Copper

Market participants are no longer

debating if the world economy will

plunge into a prolonged depression,

which would destroy commodity

demand for years, but rather if stronggrowth can be sustained for a prolonged

period.

 This change in the world view is quite

a fundamental departure from that

which was present during the dark days

of late-2008 and early 2009 and is to a

great extent responsible for the strong

recovery in copper markets and the

commodity outlook generally.

 The initial phase of the copper market

recovery has unwound the impact of the

extremely sharp correction precipitated

by the global credit crisis (and the

massive de-leveraging it caused).

  The second phase, which is already

under way and is a big contributingfactor to the most recent rally, will

likely build on firming demand and

tightening physical supply/demand

conditions (Fig 1).

  The third phase, which depends on

sustained growth in China and the

G7 (albeit at modest rates compared

to recent years), should support

commodity demand and higher prices

over the long term.

Short-Term Downside Risk—Moderating Chinese Importsand U.S. Macro Data Potential

CatalystsDespite the robust longer-term outlook 

for copper and recent market resilience

in the face of sliding Chinese imports

and poor U.S. data, there exist near-

term downside risks that are worth

exploring. Investors are concerned

over the strength of the global

recovery, especially in the U.S., and the

sustainability of record-setting Chinese

imports.

China produces some 4Mt and

consumes about 6Mt of copper

A NA LY S T F OC U S - C OP P ER

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A NA LY S T F OC U S - C OP P ER

annually. In order to balance the market

domestically, it therefore needs to

import about 2Mt. Based on the current

import numbers, China is forecast to

import 1Mt more than it needs this

year.

 These concerns seem to be reinforced

by a rise in LME and Shanghai

inventories, which may be interpreted

to imply that the scarcities of the metal

in the Chinese domestic market are

easing and that less imports are likelygoing forward (Fig 2). LME stockpiles

are at their highest since May, while

Shanghai inventories are at the highest

level in more than five years.

Not all of the inventory increase is

readily available. There is an estimated

450–500kt held by China’s SRB

following purchases of 235kt this year

and a generally discussed 150kt held in

bonded warehouses, which are likely

not readily available commercially over

the short term. As such, the growth in

available consumer stockpiles of copper

is approximately 600–700kt.

Nonetheless, the implication is that

the Middle Kingdom will need to slowdown imports into 2010, especially

if secondary supply recovers. Odds

are that Western restocking and

consumption growth globally will take

up much of the slack in the global

market resulting from potentially lower

Chinese imports, serving as an offset.

However, if the timing is not right, lower

Chinese imports could trigger a sell-off 

in the near term.

Recent corrections following poor

economic data and the consequent

reduction in risk taking and the short

U.S. dollar/long commodities trade

implies that the market may trade lowerif additional negative news arrives.

Demand is still poor, prices are at

the top of the cash cost curve and

it is unlikely that the U.S. dollar will

continue to weaken relative to the euro

indefinitely. Given that copper rallied on

surging Chinese imports, strongerthan

expected U.S. economic numbers and a

weakening U.S. dollar, a disappointment

on any of these fronts could precipitate

profit taking. The fact that investors

have gone long copper is another

reason to think a correction is possible

if a negative catalyst materializes.

However, so far, markets have not

forced copper materially lower even

as Chinese exports dropped sharply

in October and there were several

disappointing U.S. data points. Money

managers seem to be looking beyondthe short term, where they see growing

demand and potential shortages.

Demand in Recovery ModeAfter a Dismal H1/09 in theWestern World

 The deep recession in the industrialised

world, the material slowdown in

Chinese manufacturing activity that

has resulted from the collapse of export

markets in the aftermath of the credit

crisis and massive destocking will likely

precipitate a 3.8% (to ~17.3Mt) drop in

global copper demand in 2009.

Given that the Western world bore

the brunt of the fallout from the

financial crisis, it’s no great surprise

that the bulk of the copper demand

contraction has occurred in the world’s

highly industrialized economies, with

demand forecast to decline for the third

consecutive year. After dropping by 4%

in 2007 and 7% in 2008, consumption is

forecast to fall 15% in 2009 to its lowest

level since 1983.

In sharp contrast, given robust

economic activity in China in response

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A N A LYS T F O C U S - CO P P E R A N A LYS T F O C U S - CO P P E R

to the US$586B government spending

program (focused on fixed asset

investment), Chinese consumption

should actually jump as much as 20% in

2009 (Fig 3).

Consequently, copper demand

for all emerging economies should

grow by more than 4%. The surge in

infrastructure spending, including

ongoing investment within the power

sector and the lack of secondary supply

has prompted record refined copper

imports. September shipments into

China were up 149% year over year and

157% year to date. Imports into China

are running at about 290kt monthly

this year. This was perhaps one of the

biggest surprises of the year.

Strong Chinese demand also reflects

major increases in credit availability

and money supply growth (Fig 9). A

material rebound in manufacturing in

response to rising exports to the West

and restocking should also provide a

big lift down the road.

After a dismal eighteen months,

BMO Research expects a recovery in

global copper demand next year and

in 2011, with consumption forecast

to expand more than 9% (to ~18.9Mt)by 2011. Indeed, consumption has

 jumped sharply already and is on track 

to increase by ~9% in H2/09 relative to

H1/09.

China and the developing world will

very likely drive the recovery in the

same way as these regions kept demand

from collapsing in 2009. Furthermore, in

2010 and 2011, they will increase their

consumption in an environment where

the G7 countries are adding to global

demand.

After many years of detracting from

global demand growth, the U.S. should

help to lift copper consumption.

  The U.S. will likely continue to rampup spending, keep interest rates at

extremely low levels and provide ample

financial sector liquidity for most of 

2010.

Out of the US$787B allocated for the

U.S. stimulus program, only about a fifth

to a quarter has been spent so far.

Much more of the U.S. stimulus

money is to come out by end of fiscal

2010 (US$178B in direct spending and

over US$100B in tax initiatives), with

maximum impact occurring in Q4/09–

Q2/10.

Homeowner incentives should help

housing to slowly recover. PresidentObama is set to sign a bill that extends

unemployment insurance benefits for

up to 20 additional weeks in some high-

unemployment states and that extends

the $8,000 home buyer tax credit for

first-time buyers to April and provides

a new credit of up to $6,500 credit to

many buyers who already own a home.

  This is important since U.S. home

builders are the biggest users of the

metal, using an average about 440lbs

per house (Fig 4).

Refined copper consumption in

the world’s advanced economies is

forecast to grow about 1.4% in 2010

and a stronger 1.9% in 2011 (Fig 5).

  This forecast reflects the combination

of pent up consumer and business

demand, restocking and the coming to

fruition of many government-backed

infrastructure initiatives.

However, longer term growth is

likely to be somewhat muted due to

the depth of the downturn and thestill lingering problems in the western

world’s financial system. Demand

within the mature economies will also

be hampered by increased market share

of global demand from some of the

developing economies, namely China

and India.

Supply Issues Driving CopperMarket into Deficit Territoryby 2011Growing demand and supply issues,

ranging from large swaths of the

industry negotiating labour contracts

over the next year, to declining oregrades and a relatively modest and

uncertain project pipeline, are likely to

place the copper market into a deficit by

2011. A structural deficit environment

could materialise in the physical primary

copper market over the long run as

well, bringing about the possibility of 

“auction” pricing where prices clear

above the industry cost curve.

Nonetheless, despite very robust

efforts on the part of producers to

reduce supply and possible deficits

in 2011, the sharp demand decline in

2009 is expected to precipitate another

primary copper surplus (~ 110kt) in 2010,

escalating the 675kt build this year.However, labour strife and production

disruptions could materially cut this

build. Firms with projects representing

~33% of global production are set to

negotiate their labour contracts by the

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end of the year or are already taking

industrial action (Fig 6). Disruptions

continued to impact the copper market

in recent weeks, providing price support

in November and likely well into 2010.

 The combination of further industrial

action, mechanical failures and reports

of underperforming mine production

will likely limit supply growth nex t year.

Labour actions include BHP’s Spence

mine in Chile, where workers stopped

work in mid October. This action is inaddition to the ongoing strike at Vale’s

Sudbury and Voisey’s Bay operations in

Canada. No copper had been produced

at either division during Q3/09 and it

looks as if very little may be coming out

in Q4/09. While the operations mainly

produce nickel, they have a significant

amount of copper by-product: 106kt/a

at Sudbury and 40 kt/a at Voisey’s Bay.

 The potential for strikes at Codelco’s

Andina and Codelco Norte divisions

whose contracts expire at the end of 

November and December respectively,

where the Codelco workers will most

likely want the same generous deal

offered to workers at Escondida.

Codelco syndicates 1-3 are in the midst

of negotiations.

Potential work stoppages by Peru’s

28,000 mining industry workers

(who pump out an estimated 1,230kt

annually or 7.9% of global mine supply)

may cause labour-related production

reductions by the most in recent

memory (Fig 7).

Mine output continued to lag

expectations in recent months due to

other technical issues—substantial

damage to a main haulage shaft and

head frame at BHP’s Olympic Dam minein Australia due to mechanical failure

is a case in point. This resulted in the

company declaring force majeure on

some of its copper shipments, with

mine output cut by ~75% through to

March 2010. The estimated production

loss through the rest of the year will

likely be 35kt.

Palabora Mining, in Africa, reported a

15% decline in mined output during Q3

over Q2, while Xstrata reported a 9.6%

year-on-year decline in mine production

in its Q3 financial results, with output

falling from 235kt Cu in Q3 last year to

212kt Cu this year.  The combination of a series of 

announcements of lower-than-expected

production and labour issues could see

output disruptions due to “unforeseen”

events at a minimum of 700–900kt in

2010, and possibly much higher.

Due to these factors, BMO Research

has therefore cut its 2010 production

estimates by some 200kt. This should

help to unwind the inventories that

accumulated over the last several years,

tightening the copper market and

lifting prices to historically high levels

in 2010/11.

Firm Demand, ProductionRisks Spell Good News forCopper Prices Long TermWith the developing world set to

keep copper demand growing and a

recovery in the Western world, copper

consumption in 2010 through 2014 is

expected to grow a robust 3.9% CAGR.

 This is up smartly from the ~2.8% annual

growth trend seen in recent years.

  The importance of China to this

picture is critical, as the projections call

for the Middle Kingdom to account for

over 70% of all consumption growth

long term, taking their overall copper

needs to 8.3Mt by 20 14. This represents

40% of total global demand, up from

the 28% (5.0Mt) of overall demand in

2008. India’s robust long-term growth

prospects will add fuel to the China-

driven demand story as well.

 The longer-term copper price outlook 

is upbeat as the BMO thesis that the

fundamental commodities story isbullish remains intact.

  The need for massive infrastructure

spending associated with

industrialization and urbanization in

the developing world is not expected

to diminish.

Additionally, given that BMO does

not expect outsized short-term and

longterm production growth due

to industrial actions, modest capex

spending and what may be aggressive

management timetables, a return to

tight market conditions may occur in

fairly short order. This could very well

prompt a potential “auction” pricing

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environment in the not-so-distant

future.

Prolonged periods of very tight

markets are a real possibility given the

amount of new capacity that will be

required to balance the market. The

likelihood of developing the pipeline of 

projects ranges from high probability

to fairly low probability. Furthermore,

there is a very broad spectrum of risks

present, ranging from technical to

financial that could prevent projects

from materializing as planned (Fig 8).

BMO thesis that thefundamental commodities story

is bullish remains intact.

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