Copper Wired For Higher Prices

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 5

As a general rule, the most successful man in life is the man who has the best information 

 

My article titled Give It A Doubt’ was about population growth, urbanization in developing countries and the one billion people predicted to join the consuming classes by 2025.

 

“One billion people will enter the global consuming class by 2025. They will have incomes high enough to classify them as significant consumers of goods and services…” McKinsey Global Institute, Urban world: Cities and the rise of the consuming class

 

Some of these new consumers are going to be Americans but the majority are in developing countries, they might not want to be Americans but they do want at least a modest piece of what we’ll call the American lifestyle, the cell phones, flat screen TV’s, a nicer apartment, a car or maybe a motorcycle, washer/dryer, a fridge, AC - the amenities of a modern society and all the necessary infrastructure that goes with a well functioning competitive modern economy.

 

But what if all these new one billion consumers were to start consuming, over the next 12 years, just like an American? What’s going to happen to the world’s mineral resources if one billion more ‘Americans’ are added to the consuming class?

 

Let’s look at copper - here’s how much copper each of them would need to consume, per year, to live the American lifestyle…

 

Per capita consumption of copper in the United States was 10 kilograms per person 1965, the same in 1995. In Japan per capita consumption increased from 6 kilograms per person to 11 kilograms per person over the same time period. Copper consumption in Korea in 1965 was less than 1000 tons. By 1995, Korea's consumption of copper had reached 637,000 tons, or more than 14 kilograms per person.

 

In China, even after years of economic growth, per capita copper usage is about 5.4 kg. As China's populace urbanizes, builds up its infrastructure and becomes more of a consuming society, there's no reason to suspect Chinese copper consumption won't approach or even surpass U.S., Japanese and South Korean levels. There's 1.3 billion people in China, several billion more in developing countries - India, with its 1.2 billion people, is presently using 0.5 kg of copper per person. Africa, the fastest growing continent, has virtually no copper consumption per capita.

 

One billion new consumers by 2025. Can everyone who wants to live an American lifestyle? Can everyone everywhere have everything we in the developed parts of our world have?

 

“Concern about the extent of mineral resources arises when the stock of metal needed to provide the services enjoyed by the highly developed nations is compared with that needed to provide comparable services with existing technology to a large part of the world’s population. Our stock data demonstrate that current technologies would require the entire copper and zinc ore resource in the lithosphere and perhaps that of platinum as well. Even a lower level of services could not be sustained worldwide because a continuing supply of new metal is needed to make up for inevitable losses in the recycling of the metal stock-in-use.

 

Substitution has the potential to ameliorate this situation, but one should not automatically assume that technology will produce a satisfactory substitute for every service at an affordable price and precisely when needed.

 

…anthropogenic and lithospheric stocks of at least some metals are becoming equivalent in magnitude, that world-wide demand continues to increase, and that the virgin stocks of several metals appear inadequate to sustain the modern ‘‘developed world’’ quality of life for all Earth’s peoples under contemporary technology…Do we really envision a developed world quality of life for all of the people of the planet…?”  R. B. Gordon, M. Bertram, and T. E. Graedel, Metal Stocks and Sustainability

 

According to the International Monetary Fund (IMF) the consumption of metals typically grows together with income until real GDP per capita reaches about $15,000–$20,000 per capita (2005 international $) as countries go through a period of industrialization and infrastructure construction.

 

 

Countries by 2012 GDP (PPP) per capita, based on World Bank figures and current Int$

 

A few country’sstand out as well below the IMF’s $15,000.00:

  • China – $9,233
  • Indonesia – $4,956
  • Philippines – $4,410
  • India – $3,876
  • Pakistan – $2,891

Since they are still a considerable distance from the point where further increases in GDP per capita no longer increase copper consumption per person, China, Indonesia, the Philippines, India and Pakistan (and the other 113 out of 180 countries listed below the IMF’s 15,000 Int$ cutoff) are likely to continue to add significantly to global demand for copper for some time to come.

 

Capex/opex costs escalating

 

Mining is getting more difficult. The low hanging fruit has been found and put into production long ago. And these deposits are showing their age, here’s an example…

 

BHP Billiton just announced (Oct. 20th 2015) copper output dropped 3% yoy and 13% compared to last quarter because of declining grades at Escondida, the world’s largest copper mine. The company also said that despite plans to spend billions of dollars on operational improvements, including a $3.4 billion water project, the anticipated 27% decline in grade would be only partially offset.

 

Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.

 

 Capex costs are escalating because:

  • Declining ore grades means a much larger relative scale of required mining and milling operations. As a rule grades are higher at current mining operations than at development stage projects – so costs are going to be higher to remove/process the same amount of ore.  
  • A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure.


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