Citigroup announced Monday that it believes “the copper price is bottoming, and will move sharply higher in 2009 and 2010.”
As a result, Citigroup increased its price forecast for copper from US$3.50 to $5/lb in 2008, from $3 to $5.50/lb in 2010, and upped its long term price from $1.45 to $1.60/lb.
Citigroup Australia metals analysts Alan Heap and Alex Tonks asserted that the copper concentrate market “will remain very tight until 2011, with continuing pressures on TC/RCs.”
The analysts noted that “lower than expected supply growth will continue as a key factor contributing to tight markets and high prices. Disappointing supply growth has been mainly at existing operations (rather than new projects etc). With negative surprise likely to continue, mine production is forecast to be 900kt less than capability in 2009.”
They also anticipated that copper demand will recover in 2009 “with Chinese restocking and a modest pick-up in U.S. consumption. Importantly the Chinese infrastructure boom continues.”
Meanwhile, sulphur and sulphuric acid prices “have rocketed,” Heap and Tonks said, who explained that “physical ability is becoming as much an issue as price.”
“The acid market is expected to remain tight for another two years, or until additional supply comes on-stream from natural gas processing in the Mid-East and China,” they predicted. Soaring acid price are an important component of the inflating costs for SX/EW copper processes, increasing SW/EW cash costs by 15% to 98-cents per pound.
The analysts estimated that SX/EW production accounts for 20% of current copper supply and 25% of scheduled supply growth. “High acid prices are likely to restrict growth in SX/EW production, especially in Africa.”
“We have lowered our forecasts of SX/EW production by 600kt from scheduled,” Citigroup said
In their analysis, Citigroup expressed concern about the “looming global power crunch” with has implications for Chilean copper production, which now produces 35% of world copper supply.
“In April the copper companies provided US$650 million to keep diesel supplies available until 2011,” the analysts said. “Longer term solutions entail onshore LHG regasification and new coal fired power stations (planned by the copper companies.”
Meanwhile, the analysts noted that “power supply problems in Central Africa revolve around their dependence on supply imported supply, as well as problems in supply from local utilities.”
“In Zambia, Copperbelt Energy Corp. has enforced some load shedding but so far most problems have affect cobalt production, rather than copper. Power rationing was increased following supply issues from the DRC due to a line outage.”
The analysts also determined that water shortages are threatening copper production in China and Latin America, both through impacts on hydro power and processing water.
Citigroup estimated that soaring oil prices increased the direct energy cost component of copper production by about 50%. “In addition there are impacts on service costs (especially explosives) and freight (bunker oil).”
The analysts forecast that industry average cash costs will increased more than $1/lb (before by product credits) at an oil prices of US$100/bbl. At $200/bbl, oil costs rise to more than $1.10/lb (before by product credits and excluding impacts on service and freights costs.
“In some metal markets prices are approaching marginal production costs, providing some support against further price weakness,” the analysts said. “This is not the case for copper however. Although we are bullish based on a further tightening of the supply demand balance, there is great downside risk if the supply demand outlook were to deteriorate, and before production costs set a floor.”
Citigroup believes that Beijing will respond to a slowing external economy by boosting the domestic economy especially fixed asset investment.
Among China’s planned infrastructure development are:
· The rail network is scheduled to double by 202;
· Expressways to increase 75%;
· Rural roads to increase 66% by 2010;
· A 70% increase in airports by 2010;
· A 280% increase in seaport capacity.
Therefore Chinese copper demand is expected to increase at around 15%/yr on a trend basis, according to Citigroup. “China will remain a large importer of copper units. The form of imports-concentrates, scrap or cathode will depend on the relative economics.”
Citigroup also noted that inventories on both the LME and the SFE (Shanghai Futures Exchange) are falling.
In their analysis, Heap and Tonks estimated total investment in commodities to be at US$400 billion as of the first quarter, an increase of US$70 billion since last December. Inflows into commodity indexes have also been increasing. “However, in 2008 investment have increased dramatically, Inflows in 1Q08 were equal to the whole of 2007.”
In the case of copper, the analysts said the investments are equivalent to about 10% of annual demand, “but only a tiny proportion of futures volumes.” Meanwhile, while the copper price is high in U.S. dollar terms, the copper price is cheap in other currencies “stimulating consumption and increasing production costs.”
Heap and Tonks said industry average copper costs have increased by 60% over the last four years and 22% over the past two year, to a present estimate of 77-cents/lb. “The main contributors to cost inflation have been consumables (especially explosives), labour and energy, with by-product credits and falling TC/RCs important offsets.”
“We estimate industry average sustained margin to be 45%, leading to a long-term price of US$1.60/lb,” they concluded.