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Message: Shrinking Stockpiles Put Copper On Track For A Price Rise Despite Trade War Uncertainty
Tim Treadgold Contributor
Slowing global growth and uncertainty about the chance of a permanent settlement in the China v U.S. trade war might not prevent the development of a copper shortage and a higher price for the worlds most important industrial metal.
Hints of copper entering a period of short supply can be seen in the collapse of stockpiles of the metal held in the warehouses of commodity exchanges.
At the London Metal Exchange the copper stockpile has dropped to a five-year low of 124,450 tons, less than half the 380,000 tons held in February.
Newly-made copper coil: Munshi Ahmed/Bloomberg photocredit:BLOOMBERG NEWS
The copper decline was a feature of a briefing delivered to investors last week by Ivan Glasenberg, chief executive of the big commodity trading and mining company, Glencore.
He said inventories of metals such as copper and zinc had dropped to near record lows.
Copper Stockpile Down To 12 Days Consumption
Copper supplies could currently meet 12 days of industrial demand compared with an average of 17 days in the three years since 2015. Zinc was down to 7 days compared with a long-term average of 13 days, and the nickel stockpile had declined to 66 days compared with an average of 110 days of consumption.
Because it is used in multiple industrial and technical applications the rate of copper consumption is seen as a key forward indicator of economic activity.
Under normal conditions the fall in spare copper to 12 days would have been matched by a rise in the price. That has not happened with the copper price sliding from around $3.20 a pound in February to recent trades at $2.78/lb.
Interestingly, that latest price is close to the mid-year low, when concern about the effects of the trade war were starting to be felt.
The fact that the copper price has been steady even as stockpiles have continued to decline helps explain why most of the worlds big mining companies, including Glencore, have copper high on their list of preferred mine-development options.
But, even if all the major miners would like to produce more copper to catch the current price, or a future increase, they are unlikely to achieve that aim because most potential new mines are several years from starting production while a recent spate of significant discoveries in South America and Australia will take even longer to develop.
Morgan Stanley, an investment bank, last week noted in a research report that a number of copper projects had started appearing, though their "time to first production was at least three years on average."
Newly made copper cathode sheets: Andrey Rudakov/Bloomberg.© 2017 Bloomberg Finance LP
The underlying reason for the fresh look at copper by Morgan Stanley was concern that there were too many potential new projects which could hit the market just as demand dropped off, potentially flooding the market.
"Copper is clearly a preferred commodity." Morgan Stanley said. "However, the time to market for many of these projects is at least four years and up to 10 years from today."
Development Approvals Hard To Obtain
Even brownfield (existing mine) expansions, had significant issues to manage, including water supplies, power, carbon dioxide emissions, tailings (waste) storage and social license (government approvals) which are increasingly difficult and time-consuming processes, the bank said.
Even further out on the time horizon is the prospect of two big new Australian copper discoveries, BHP's Oak Dam West project near its Olympic Dam mine in South Australia, and the Winu discovery by Rio Tinto in the Great Sandy Desert of Western Australia.
Early days as it is for the BHP and Rio Tinto copper strikes there is widespread speculation in the Australian mining industry that the groundwork has been laid for two new world-class copper developments -- but not for some time.
The immediate outlook is for copper supply to stagnate with Glencore's Glasenberg tipping "a bit of a deficit" this year.
If he is right then the reduced supply of newly-mined copper could see the stockpile of spare metal decline further with a positive impact on the price.
I studied geology in the 1960s and worked for a small mining company before getting a start in journalism during the 1969 nickel boom. Since then I've covered repeated booms and busts in the commodities sector for a passing parade of newspapers, magazines and website. I am a...
Tim Treadgold has been writing about the mining and oil industries for more than 40 years.
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