New copper finds needed to replace reserves: MEG

In a recent study, Halifax, N. S.-based Metals Economics Group (MEG) concludes that copper reserves in the ground maintain a comfortable cushion of about 30 years’ production. However, two potential problems are identified in the report, entitled Strategies for copper reserves replacement: a shortage of major new discoveries, and escalating costs.

The study says that the largest copper producers, accounting for 70% of world supply, increased their annual copper production between 1997 and 2006 by 66%, to almost 10.9 million tonnes per year from 6.5 million tonnes. They have used both exploration and acquisition to replace almost three times their production over the past 10 years at an average cost of US$119 per tonne, for a remaining reserve life of about 30 years as of 2006.

Over the past 10 years, the global copper industry has also added enough reserves to keep ahead of production with enough copper currently in the pipeline of existing projects to increase production in the near to medium term. However, things are not as rosy as they seem. The study has identified two factors that will affect the industry over the long term: escalating costs at all project stages, and a shortage of major new discoveries to replenish reserves from anticipated higher production.

The decline in major new discoveries over the past decade will place pressure on most companies’ production in the long term. Since 1995, about 172 million tonnes of copper has been mined worldwide; at the same time, almost 195 million tonnes of copper resources have been identified in major discoveries. While the new discoveries may appear sufficient to replace copper production, less than 18% of these resources had been updated to reserves by year-end 2007, and many are located in countries with significant political risk. Further, since 1999, discoveries have fallen short of what is needed to replace production. (It is possible that current discoveries not yet taken into account will add to reserves.)

While major copper producers have added enough reserves to keep slightly ahead of rising production over the past 10 years, most of those reserves were added at current operations, rather than via grassroots exploration. And in the long term, the balance will reverse, as recently discovered resources are inadequate to replace the copper being mined, particularly in light of increasing production. Given the recent significant inflation in exploration costs, companies should expect to spend more to replace depleted reserves. Another reason for escalating exploration costs is that companies are expanding into more remote and riskier regions.

MEG expects copper exploration budgets to continue to rise in 2008, and it is uncertain whether significant new discoveries will be made to address the long-term imbalance.

The study reports copper production of almost 15 million tonnes in 2005, while about 13.5 million tonnes were found. In 2006, copper production was about 15 million tonnes, versus about 13 million tonnes found. In 2007, production rose to about 15.5 million tonnes copper, while only about 7 million tonnes were found. About US$700 million was spent on copper exploration in 2005, US$1.2 billion in 2006 and US$1.8 billion in 2007.

Lisbon, Portugal-based International Copper Study Group (ICSG) reports world mine production of 14.9 million tonnes copper in 2005, 15 million tonnes in 2006 and 15.4 million tonnes in 2007. ICSG projects 2008 mine production at 16.4 million tonnes copper, refined production at 19.6 million tonnes, and copper usage at 18.5 million tonnes. The 2009 forecast puts mine production at 17.9 million tonnes copper, refined production at 21 million tonnes, and copper usage at 19.4 million tonnes.

What about prices for the red metal? In early July, Citigroup raised its short-term price targets for copper, to US$5 per lb. in 2009, and US$5.50 in 2010. The catalysts for the higher price forecasts are unwinding of speculative long positions, a drop in Chinese inventories, production constraints in existing mines, and rising production costs. However, Citigroup forecasts much lower long-term prices: US$4 per lb. in 2011, US$2.50 in 2012, US$1.50 in 2013, and US$2 in 2014. Their production and consumption forecasts for 2014 are: mine production of 25.7 million tonnes, refined production of 25.8 million tonnes, and consumption of 26.2 million tonnes.

The futures markets are less bullish about short-term copper prices. In early July, the Nymex prices for 2009-10 copper futures were in the range of US$3.60-3.90 per lb.

Deutche Bank’s short-term price projections are also less bullish, while their longer-term projections are quite similar to those from Citigroup. In a June report, the bank projects a price of US$3.66 per lb. copper in 2009, US$3.10 in 2010, US$2.75 in 2011, US$2.50 in 2012, and US$2 in 2013. For 2010, the bank forecasts production of 20.9 million tonnes refined copper, and consumption of 20.4 million tonnes.