THE COMING COPPER CRUNCH
"...With the current growth rate in demand for copper running at over 400,000 tons annually, even assuming all capacity is brought on line, within 3 to 4 years available supply will not be able to meet world demand. Why the looming imbalance? As is so often the case these days, look to China and India, where the rush to build the infrastructure necessary to sustain economic growth is soaking up commodities on a global scale. It is a very good time to start paying attention to copper..."
IIn the event you haven't been paying attention to copper - and most investors have not - it is currently selling for around $1.30 per pound. For reasons I'll touch on now, it's getting ready to go a lot higher.
The coming copper crunch
JP Morgan's estimate of the world mine supply of copper in 2003 was 10.77 million tons. Throw in scrap amounting to another 1.1 million tons and you arrive at a total estimated annual supply of about 11.87 million tons.
Brooke Hunt, a respected mining consultation firm, estimates that - with all copper production running at 100% of capacity and with Coldelco's 180,000 ton stockpile coming on to the market, a one time event - total excess capacity among suppliers could add another 1.2 million tons, for a total of about 13 million tons.
But that is a hypothetical total because it is iffy at best to assume that all mines can produce at 100%. So, that's the supply side of the equation.
On the demand side, world consumption of copper in 2003 was estimated at just a figurative hair under supply, at 11.83 million tons. The news flash, however, is that demand is increasing: JP Morgan estimates that in 2004 demand will rise to 12.35 million tons, and accelerate from there.
Considered from another angle, with the current growth rate in demand running at over 400,000 tons annually, even assuming all capacity is brought on line, within 3 to 4 years available supply will not be able to meet world demand.
Why the looming imbalance? As is so often the case these days, look to China and India, where the rush to build the infrastructure necessary to sustain economic growth is soaking up commodities on a global scale. In the case of copper, it's largely in the form of wire and piping.
In China alone, the ecologically infamous (but it's 95% hysteria, in my opinion) Three Gorges Damn will generate 20,000 megawatts of power, and the Chinese Government has just given approval for another four dams upstream on the Yangtze which will bring on another 38,000 mega-watts of power. These are just small indications of how broadly the Chinese central government is embracing the idea of a market-based economy. They have plans for that power, and it's headed for copper wires laid down in massive infrastructure projects.
Put simply, there is no end in sight to copper demand.
What about new mine supply?
The big issue with supply is that the majority of the world's copper deposits have already been discovered, mostly in the 1960s. They've been found because copper is usually located in near-surface porphyry deposits - structures with a large geological "footprint" that make them relatively easy to find and, once found, easy to understand and to exploit.
As a result, new discoveries are hard to come by and tend to be deeper and harder to mine. Recent examples are Ivanhoe's Turquoise Hill in Mongolia, a buried porphyry, and Rio Tinto's recent find in Arizona, a resource located at a depth of 2,000 meters. To state the obvious, the deeper the mine the more time and the more money is required to put the mine into production.
For example, Turquoise Hill - a large resource estimated at 19 million tons - won't be put into production until 2007 at the earliest, and, depending on the size and production plan, only after an expense of up to $2 billion.
Cutting to the chase, in order for the copper industry to off-set the fast approaching supply/demand shortfall, it will have to do much, much better - in fact, it will require a new mega-mine on the order of Turquoise Hill to come on line each and every year for the foreseeable future.
Yet, looking over the horizon, there is only one large copper mine, Sossego in Brazil, slated to come on stream in the foreseeable future, later this year, or early next.
Bottom line: the odds of the mining industry being able to find and bring on enough new mine supply to head off the coming copper crunch - in the short, medium or even long-term - is slim to none, and slim is being body-searched at the airport on the way out of town.
It is a very good time to start paying attention to copper.
[Editor's note: If you're interested in investment opportunities in copper, you may want to take a look at John Myers' natural resources trading service... expressly designed to capitalize on the commodities boom. John's last copper trade - calls for December 2003 - cashed in on 49% profits in two and a half months!
For details, see: www.internationalspeculator.com/p/?20040216.php&ppref=kitbmcu
International Speculator Doug Casey has been seeking and finding incredible opportunities around the world for 25 years. Mr. Casey is the author of the best-sellers Crisis Investing and Crisis Investing for the Rest of the 90's, as well as one of the more opinionated contributors to the Daily Reckoning .
What do you think? Leave a comment below.
Sign up for regular Resilience bulletins direct to your email.