Miners have been quick to cut their cloth by delaying and even canceling mine expansion and new projects. There is logic in that: the resource does not go away and projects can be revived if demand dictates in the future.
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But others have argued that the delay between planning and production is so long that we could be facing a supply shortfall by delaying projects that can take five to 10 years to come to full production. Not so, says Simon Hunt, base metals veteran and owner of Simon Hunt Strategic Services, reported in a Financial Times article this week.
Focusing specifically on copper, the article lists four principal reasons why, in Simon Hunt’s view, the market will not face a supply crunch later this decade as a result of the current slowdown in investment.
● Future global growth will be slower than in the past 20 years. This will be because the Western world’s baby boomers have mostly passed age 55 and have begun saving for retirement. It will also be because post-credit-crises’ growth slows sharply.
● China’s labor force, which grew by 3.5 percent in the past 10 years, will start falling next year, and will continue to do so for the next 20 years. The implication is that China’s growth will halve from the 10.2 percent of the past 10 years. A less metals-intensive environment should follow.
● Demand is the common denominator used to express consumption. There are two forms of demand – material which goes into a furnace and material that the financial community buys, mostly warehoused outside the reporting system. Stripping out the latter, global refined consumption has grown by an average of 2.1 percent per year from 2000 to 2010, compared with 2.4 percent in the 1990s.
● Copper’s intensity of use is falling because of substitution. It will continue to fall. World copper consumption will grow even slower, resulting in no shortages.
Our take is Points 1 and 2 have to both pan out as expected if an overall slowdown in demand is to materialize. Just because the West’s baby boomers are nearing retirement does not necessarily mean global copper demand will fall; copper demand in mature markets has been relatively static or falling for some years anyway — the growth has come from emerging markets that potentially have significant growth left in them.
True, China’s labor force will for demographic reasons decline in coming years, but demand for copper-containing products and infrastructure should remain solid as more of the population urbanizes in China and population growth continues in India, Indonesia, and Brazil.
Point 3 is an interesting statistic and one oft-overlooked: the difference between real and apparent demand. As we have seen with aluminum, however, financial consumption of metal has still had the effect of creating supply shortages, as expressed by high physical spot premiums, so investor consumption can still have the effect of creating supply shortages even if the metal is only temporarily denied to the market.
On balance, Simon Hunt makes several interesting observations and we would agree generally that a supply crunch for copper is much less likely than the doomsayers would have us believe.
Image source: japanstatus.org