A decade from now: a modest surplus, at best

Stumbling along in second-gear - might well be the nature of Western economic growth for much of the first half of next year. If that uncertain mood is sustained, it would do no more than lay the basis for much higher copper prices than today, over the longer-term.

The reason for that is because investment in new copper mines was already insufficient even before the onset of the global recession. Few new world-class copper projects have been identified in the past decade. The global recession has merely deepened medium to long-term supply worries, as capital expenditure on existing mines and mine expansion has been slashed. This will not only lead to delays from new supply sources but, because mine maintenance has also suffered from the recession, more supply disruptions can be expected.

The International Copper Study Group (ICSG) pinpointed the medium-term copper supply problems. It has revised down to 3.8% its projection for mine production capacity over 2009-2013 from a previously anticipated rate of growth of 5%; about 3.9 Mt of new mine or expanded mine supply will come on stream over the next four years, or about 1.2 Mt less than that previously expected. According to our own calculations, some 6.5 Mt/y of new copper mine supply from projects that we deem as major - holding current estimated mineral resources of more than 500 Mt - could come online by 2020. This 6.5 Mt/y is the amount of new mined copper that could emerge, when these projects ramp up to full production capacity. In addition, we estimate that another 4 Mt/y of new copper mine supply, from projects with current estimated mineral resources of less than 500 Mt, may also appear between now and 2020.

Will all these projects come online without any mishap or delay? Therein lies copper's long-term conundrum and its main allure as a speculative investment. Projecting global copper consumption growth rates over the next ten years is fraught with assumptions, but it has not stopped the likes of BHP Billion suggesting that there could be a shortfall of 10 Mt by 2020. That seems to us to be an extreme scenario - but we certainly believe that supply will be hard pressed to keep pace with likely demand.

At global copper consumption growth rates of between 3%-5%, by 2020 world consumption would be 25 Mt-31 Mt a year. Mine supply is currently around 15 Mt/y; the rest (~3 Mt) derives from secondary sources, such as copper scrap. If all new projects and mine expansions currently planned actually come to fruition on schedule, then we estimate that the global copper market will be, at best, in a modest surplus 10 years from now. But the odds are that there will be delays to some of this potential new supply, and this will lead inevitably to a deficit. Greater levels of exploration expenditure will therefore be crucial for the discovery of new copper deposits, to ensure that the risk of a supply crunch is avoided. Even if all goes well copper prices look set to remain robust over the next decade.