Copper Demand Predicted to Triple According to CRU

by on

Following on from our previous post entitled, Copper price set to fall according to CRU and MetalMiner we are continuing our discussion of CRU’s recent report and looking at supply and demand over the next two decades. Though the report does not make any price predictions, it does predict a massive increase in mining activity on the back of an increase in global consumption from about 18m tons today to nearly 40m tons by 2030. Unfortunately, CRU does not explain where they see this near tripling of demand coming from, though the implication is it is due to the industrialization of the developing world and their 3bn population to similar levels of affluence as we enjoy in the west. To summarize both the rise in demand and the potential to meet that demand by new sources of supply the following graph rather neatly summarizes the challenges:

Unfortunately China’s increase in demand is not broken out from the overall increase in global demand on this graph. As demand has fallen or been largely flat in mature economies (which still represents half of world demand according to the ICSG ) it has risen dramatically in Asia, in the 80’s Japan, the 90’s the tigers and in this decade, China. China so the argument goes, still has a long way to go, with something like 180m of it’s 1.3bn having reached some measure of middle class affluence, that leaves in excess of a billion to go, plus another billion in India, plus Indonesia, parts of South America, Russia and so on. Some will develop faster than others but the direction is clear. May be CRU’s projection of 18 to 40m tons per annum is not so widely out but we can’t help but feel that the same will happen in the developing world as has happened in the west. As a country’s major infrastructure becomes established, the demand curve begins to flatten. Furthermore, as prices rise (see below) substitution steps in. Plastic for copper pipe and fiber optic for copper cable are just two examples.

If indeed demand did continue towards 40m tons (and looking at the graph above you have to ask why would it not continue to follow the flatter trajectory of the last 5 years which included rapid industrialization in China?) what would that do to the supply side and hence the price? CRU’s graph is projecting massive new mining resources coming on stream but ore grades generally are declining and new finds are in remote and/or politically unstable regions, pushing up the cost per ton of copper delivered to the buyer. After this price shock, miners that survive will be slow to invest in marginally cost attractive fields in the short term, so a supply deficit will reassert itself at some stage in the next two to four years. Assuming demand does continue to rise (even if we don’t take CRU’s steep demand curve as the mostly likely) one could expect prices to rise significantly in the early to middle part of the next decade.

If I were running a business with a core dependency on copper, I would be spending some time pondering the medium to long term strategic options. Over the next two to four years, it is possible to hedge prices via the LME and OTC instruments, but further out it becomes harder. How price sensitive is the company’s finished product and what non copper alternatives are there as potential substitutes? Should I be spending more on R&D now to develop lower copper content alternative products for the future? Copper seems comfortably affordable today compared to last summer, but the good times won’t last forever.

–Stuart Burns

Leave a Comment

Your email address will not be published. Required fields are marked *