COPPER MARKET TRENDS REPORT

Transcription

1 Traducido por Patricio Mason, M.A. / Translated by Patricio Mason, M.A. Cochilco COPPER MARKET TRENDS REPORT EXECUTIVE SUMMARY The first quarter was noted for a slump that drove daily prices all the way from $374 /lb. In early February to $342 /lb. In mid-march. The supply and demand fundamentals remained largely unchanged, but contrary to our last report the year-end market balance ended on the surplus side. As a result, London Metal Exchange (LME) inventories rose 43 percent in January-March. In addition, events in major copper consumer economies, notably Europe, the United States, and China, impacted both market expectations and the financial component of metal prices. Financial issues in Europe mounted as the European Union and the IMF required Cyprus to levy a tax on deposits as an unprecedented bailout condition. As expectations grew that other eurozone economies might require financial aid going forward, so did fears that such a requirement might be enforced elsewhere. While the risk of insolvency in Cyprus seemed to recede as of late March, fears about other eurozone economies needing a bailout have not. The sluggish U.S. economy remains a concern. Congress has yet to agree on public spending and government borrowing ceilings and talks now face a May 19 deadline. In China, growth expectations are somewhat more modest than in late 2012 following weaker manufacturing and PMI results. In addition, rising inflation could bring about a tightening of monetary policy in the coming months. These developments, plus a stronger U.S. dollar, pulled copper prices down in March. A strong dollar relative to the Japanese yen and the euro slows down commodity demand. Cochilco expects world demand for copper to grow 1.4 percent in 2013 and 3.1 percent in While lower than the 1.5 percent and 3.4 percent growth rates forecast in January, the basis of comparison is higher due to strong Chinese demand in The global mined copper supply should expand 3 percent in both 2013 and The market is expected to show a 66 kmt and 89 kmt surplus in 2013 and respectively, roughly the same as projected in January. As such, our price expectations for 2013 and 2014 hold at 357 /lb. and 332 /lb., respectively.

2 Traducido por Patricio Mason, M.A. / Translated by Patricio Mason, M.A. Cochilco Contents Executive Summary... I I. Industry Outlook... 1 II. Long-Term Outlook Mined Copper Supply, Refined Copper Demand Market Balance Chinese Demand... 4 III. The Outlook for the Next Two Years Metal Exchange Inventories World Demand Global Growth Outlook Refined Copper Demand: Global Estimates Global Refined and Mined Copper Supply Global Mined Copper Output Chilean Mined Copper Supply, Global Refined Copper Supply World Refined Copper Supply and Price Prospects Refined Copper Market - World Balance Copper Price Projections IV. Unrefined Copper Market Global Smelter Production Global Concentrate Production Concentrate Balance and Treatment Charges (TC) Bibliography... 24

3 I. INDUSTRY OUTLOOK Copper inventories were up significantly in Q1 across the LME, Comex, and Shanghai. Figure 1 shows an average of 11.8 days consumption in January 2000-March 2013, a period that includes the strong gains of , notably the 31.4 days peak of December This was followed by a bull run and low-inventory spell that took the average down to 4.4 days consumption. This lasted from approximately January 2004 through the subprime mortgage crisis of September Inventories averaged from 5.3 days consumption in October 2008 to 14.9 days in February At present, exchange inventories stand at 15.7 days or 878 kmt, the highest since prices broke through the 200 /lb. barrier in December FIGURE 1: COPPER PRICE AND INVENTORIES AS CONSUMPTION DAYS $%" $!" )" (" '" %"!" ;3MNODGPQ3M"@.RN".890+:9";<,=1>/?<,"@+A=B"%!!!-%!$&"CD+04EF".890+:9";<,=1>/?<,"@+A=" ;<//90"G0H49"CIJ2KLF" IJ2KL"" *+,-!!"./0-!!" *12-!!" 345-!!" *+,-!$"./0-!$" *12-!$" 345-!$" *+,-!%"./0-!%" *12-!%" 345-!%" *+,-!&"./0-!&" *12-!&" 345-!&" *+,-!'"./0-!'" *12-!'" 345-!'" *+,-!#"./0-!#" *12-!#" 345-!#" *+,-!("./0-!(" *12-!(" 345-!(" *+,-!6"./0-!6" *12-!6" 345-!6" *+,-!)"./0-!)" *12-!)" 345-!)" *+,-!7"./0-!7" *12-!7" 345-!7" *+,-$!"./0-$!" *12-$!" 345-$!" *+,-$$"./0-$$" *12-$$" 345-$$" *+,-$%"./0-$%" *12-$%" 345-$%" *+,-$&" #!!" '#!" '!!" &#!" &!!" %#!" %!!" $#!" $!!" #!"!" Source: Cochilco, based on London Metal Exchange. Inventories have risen strongly but not uniformly, with most increases being reported by LME warehouses in Belgium, New Orleans, and Malaysia. These facilities alone accounted for nearly 86 percent of inventory gains in January-March (see Section 3.1). Most of these developments resulted from weaker Chinese demand amidst uncertainty over the future of the real estate market and recent reports about a domestic glut created by strong purchases in Chinese copper consumption grew 11.7 percent in 2012, a strong rate yet still below the 14.7 percent averaged in Accounting for the expected drop is a rise in inflation that could herald a tightening of monetary policy. The People s Bank of China has already designated inflation control as a key target for In addition, China levied a 20 percent tax on gains from the sale of second homes in a bid to cut down on real estate speculation. Housing prices have been on the rise since late 2012, gaining 2.1 percent year-on-year in February alone. In some cities, including Beijing, rises exceeded 8.5 percent (see Section 3.2.2). Having said that, the supply is expected to expand by some 510 kmt in 2013 as new projects come on stream. These include Sierra Gorda, Ministro Hales and Caserones in Chile; Las Bambas, Toromocho and Antapaccay in Peru, and Oyu Tolgoi in Mongolia (see Section 3.3). 1

4 II. LONG-TERM OUTLOOK As noted in past reports, long-term prospects remain bright in spite of lower Chinese growth and the financial issues facing leading economies. Massive urbanization plans underway in both China and India should fuel demand for copper manufactures for some time to come. 2.1 MINED COPPER SUPPLY, In the global mined copper output should grow from 17.8 to 27.4 million MT, an average of 3.7 percent a year. While sulfide ores currently account for nearly 80 percent of the global output, this should grow to 85 percent in Oxide ore production should stay relatively stable at an average growth rate of 0.8 percent a year. This includes both facilities under construction and highly probable projects that could start contributing significant volume in It also includes probable projects whose engineering stage makes delays and/or revisions more likely. FIGURE 2: EXPECTED MINED COPPER OUTPUT, (KMT) )+#+++' %*#+++' %+#+++'!"#$%&'!(#)%*' %+#*"$' %+#$,&' %!#&*&' %!#$*,' %%#!)$' %%#$*!' %,#))(' %*#+%"' %*#$+"' %&#&(+' %"#,(!'!*#+++'!+#+++' *#+++' +' -./01'-213'' ' 89:;6' %+!)' %+!,' %+!*' %+!&' %+!"' %+!$' %+!(' %+%+' %+%!' %+%%' %+%)' %+%,' %+%*' Source: Cochilco, based on Wood Mackenzie. 2.2 REFINED COPPER DEMAND In world consumption of refined copper, including primary and secondary production, should expand 3.3 percent a year from 20.9 to 31.4 million MT. Most growth should come from India, with an average increase of 9 percent a year or 1.7 million MT in That, however, would account for just 5.4 percent of world demand. Assuming average manufacturing growth of 9.9 percent a year, Chinese consumption should rise from 43 percent in 2013 to 51 percent or 16 million MT in As noted below, in 2024 China alone should require more copper than the rest of the world combined. 2

5 FIGURE 3: REFINED COPPER CONSUMPTION GROWTH (%) &)"'''% &#"'''% -./% &#"''#% &*"'''% &+"'''% :;<=9%647839%.23>5%01238% &*"++!% &$"'''% &("'''% &&"'''% &'"'''%,"'''% &("')#%!"!#$% %647839%!"'''% ('&$% ('&+% ('&*% ('&#% ('&)% ('&!% ('&,% ('('% ('(&% ('((% ('($% ('(+% ('(*% Source: Cochilco, based on Wood Mackenzie. The above assumes mostly stagnant (0.9%/year) European consumption as China s copper manufactures gain competitiveness. Assuming annual manufacturing growth of 1.4 percent, physical copper demand should rise from 3.8 to 4.2 million MT. While it would remain the secondlargest consumer, Europe s share would drop to 13.4 percent from 18.6 percent at present. U.S. consumption would drop from 1.8 to 1.65 million MT or 0.8 percent a year on average, placing third among consumer nations with a 5.3 percent share in Consumption in each of Japan and South Korea would fall 0.5 percent a year. Japanese manufacturing growth should continue to deteriorate due to lingering competitiveness issues. In Brazil, manufacturing is expected to grow by 3.3 percent a year, driving copper consumption growth to an average of 4.9 percent a year for a demand of some 780 kmt by Figure 4 shows expected long-term consumption in leading copper consumer countries. FIGURE 4: LEADING COPPER CONSUMER COUNTRIES, (KMT) 35,000 30,000 25,000 China Europe U.S. Japan South Korea Russia Taiwan India Brazil World World 31,454 20,000 15,000 10,000 5,000 China Europe 16,006 4, Source: Cochilco, based on Wood Mackenzie. 3

6 2.3. MARKET BALANCE Figure 5 shows the physical copper market balance for As noted, a moderate 100 kmt surplus is expected in 2013 and This surplus increases in as projects coming on stream in start to reach design capacity. These include Oyu Tolgoi in Mongolia, Salobo in Brazil, Toromocho in Peru, and Caserones in Chile. Additional projects slated to come on stream include Sierra Gorda in Chile, Las Bambas in Peru, Sentinel in Zambia, and a Freeport-McMoRan expansion in Indonesia. In the refined copper market goes into a deficit condition as grades decline and older operations are decommissioned. These include Bingham Canyon, Ray SX-EW and Robinson in the U.S., Alumbrera in Argentina, and Collahuasi SX-EW and Manto Verde SX-EW in Chile. FIGURE 5: PHYSICAL COPPER MARKET BALANCE, (KMT) Supply /Demand Million MT Source: Cochilco, based on Wood Mackenzie. Market Balance Refined Copper Supply Copper Demand Market Balance kmt CHINESE DEMAND Figure 6 shows shares of world copper consumption in by China, Europe, and the United States, the world s largest consumers. The Chinese share grew from 10.6 percent to 43.3 percent, an annual average increase of 14.7 percent. In stark contrast, U.S. and European shares slipped 3.8 percent and 0.9 percent a year, respectively.. While European demand began to decline following the subprime mortgage crisis, the U.S. slide started in 2001 as Asia, especially China, started mass-producing copper manufactures. FIGURE 6: LEADING COPPER CONSUMER COUNTRY SHARES (%) 4

7 Rest of World U.S. 40 Europe Source: World Metal Statistics. China Chinese consumption grew 11.7 percent in 2012, better than the previous two years (4.2 percent in 2010 and 7.2 percent in 2011) but below the overall 14.7 percent average for While the status of Chinese inventories is not publicly available, it is safe to assume that part of the increase in 2012 comes from inventory buildup, a conclusion that tallies with the current perception that the overall copper market is in a surplus condition. 5

8 III. THE OUTLOOK FOR THE NEXT TWO YEARS 3.1 METAL EXCHANGE INVENTORIES As noted in the preceding Section, copper inventories are on the rise. In January-March, LME, Comex and Shanghai inventories gained 43 percent, going from 615 kmt to 878 kmt. However, as Figure 7 shows, LME warehouses alone accounted for 86 percent of the increase. These gains drove up inventories to 15.7 consumption days at the close of March, well above the 11.8 consumption days averaged from January 2000 to March This period includes the strong gains of , which brought consumption days to as high as 31.4 in December 2002 as copper traded at 72.5 /lb. In contrast, in June 2005 copper traded at /lb. and inventories fell to a low of 1.6 days consumption. FIGURE 7: COPPER EXCHANGE INVENTORIES (KMT) ± Oct Dec ± Jan Mar LME Comex SHFE Source: Cochilco, based on London Metal Exchange. The sudden exchange inventory increase has several possible explanations, notably stagnant European demand for Chinese manufactures and a shift by Chinese authorities to domestic demand at the expense of export- and investment-driven growth. In February, China s overall copper purchases were down 15.1 percent year-on-year while refined copper purchases dropped 43 percent. In tandem, China s copper demand in 2012 was up 11.7 percent, above market expectations of about 5 percent. The increase might signal an inventory buildup and a subsequent reduction in demand going forward. FIGURE 8: LME COPPER INVENTORIES (KMT) 6

9 ± Oct Dec ± Jan Mar Source: Cochilco, based on London Metal Exchange. Another likely explanation are incentives proffered by warehouses in Belgium, New Orleans and Malaysia since mid-2012, when copper inventories were low. These incentives, which ranged from $80 to $100 per ton of copper cathodes (equivalent to 3.6 /lb. and 4.5 /lb.) depending on facility, remain largely in place. This tactic, used to keep the metal storage business profitable, has induced an inventory buildup. Figure 8 shows changes across LME warehouses in the last two quarters while Figure 9 shows monthly inventories at facilities in Malaysia, Belgium, and New Orleans, which account for a significant share of LME inventory growth. Holdings clearly pick up starting in September FIGURE 9: INVENTORIES HELD IN MALAYSIA, BELGIUM, AND NEW ORLEANS (MT) 180, , , , ,000 80,000 60,000 40,000 20,000 0 Malaysia New Orleans Belgium 165, , ,800 Source: Cochilco, based on London Metal Exchange. 7

10 3.2 WORLD DEMAND GLOBAL GROWTH OUTLOOK Recent IMF estimates set global growth in 2013 and 2014 at 3.5 percent and 4.1 percent, respectively, as the U.S., eurozone and Chinese economies gradually start to bounce back. However, as of the first half of March, congressional Democrats and Republicans in the U.S. had yet to reach consensus on a way out of the fiscal crisis. On December 31 Congress passed a bill partially deferring the effects of the so-called fiscal cliff. Households with incomes of over $400,000 a year had their taxes raised and automatic spending cuts were held up for two months. On March 1, failure to reach an accord triggered $85-billion budget cuts that have impacted health and defense spending especially hard and should make a 0.5 percent dent in GDP growth in Just prior to a March 27 deadline, Congress approved a bill funding federal agencies through September 30, the end of the fiscal year. Also pending is a decision to raise the $16.4-trillion debt ceiling, a crucial budget planning component. After missing a February deadline, the U.S. Congress is now required to reach agreement by May 19. In the eurozone, two events helped dispel a perception of diminishing risk that had gained ground across markets in January and February. First, a political impasse in Italy, the eurozone s third economy, following legislative elections that failed to yield a clear majority, hampering efforts to form a new government. Unless agreement is reached, the current government may be forced to call a new election whose results will be hard to predict. The standoff prompted Fitch Ratings to downgrade Italy s credit from A to BBB+. The second week of March the European Union and the IMF approved a 10-billion bailout of Cyprus outsized financial system, whose assets are eight times the country s GDP (IMF). In contrast to aid provided to Portugal, Italy, Spain and Ireland, the EU and IMF required a 9.9 percent levy on bank deposits exceeding 100,000 and a 6.75 percent tax on the rest, a requirement intended to raise 5.8 billion from depositors. The condition departed from established European Union practice considering personal savings off-limits and set off fears of similar requirements among savers across the eurozone. Although Cyprus accounts for barely 0.2 percent of eurozone GDP, the refusal by the Cypriot Parliament to agree to these conditions raised fresh concerns about the viability of the euro across the region. With housing prices rising steadily since Q4 2012, China slapped a 20 percent tax on home sales in a bid to discourage speculation. This development bears watching in coming months as it risks directly impacting demand for commodities, copper included. Figure 10 shows home prices across the seventy largest Chinese cities from January 2001 to February FIGURE 10: HOUSING PRICES IN CHINA (%) 8

11 Jan- 11 Feb- 11 Mar- 11 Apr- 11 May- 11 Jun- 11 Jul- 11 Aug- 11 Sep- 11 Oct- 11 Nov- 11 Dec- 11 Jan- 12 Feb- 12 Mar- 12 Apr- 12 May- 12 Jun- 12 Jul- 12 Aug- 12 Sep- 12 Oct- 12 Nov- 12 Dec- 12 Jan- 13 Feb- 13 Source: National Bureau of Statistics of China. In Beijing, Fuzhou and Nanning, prices for homes 90 square meters in size rose 8.5 percent, 6.5 percent and 6 percent, respectively, making these cities a focal point for price controls. In addition, annual inflation stood at 3.2 percent in February, the highest since April The People s Bank of China designated inflation control a key target for 2013, noting that it will shift monetary policy from expansionary to neutral. Should inflation fail to moderate in the coming months, restrictions on credit may also be applied. Figure 11 shows GDP and manufacturing results across leading consumer countries and blocs. While Chinese growth has slowed down, it still leads expansion of global GDP. Japan and the eurozone have failed to revert the downtrend. FIGURE 11: GDP AND MANUFACTURING, LEADING COPPER CONSUMERS Source: International Monetary Fund. The manufacturing PMI for the eurozone and Japan remains solidly in contractionary territory. Only the United States, Brazil and China show signs of growth (Figure 12). FIGURE 12: PMI, LEADING COPPER CONSUMERS 9

12 65 60 Eurozone U.S. Brazil China Japan Contrac on/expansion Jan- 11 Feb- 11 Mar- 11 Apr- 11 May- 1 Jun- 11 Jul- 11 Aug- 11 Sep- 11 Oct- 11 Nov- 11 Dec- 11 Jan- 12 Feb- 12 Mar- 12 Apr- 12 May- 1 Jun- 12 Jul- 12 Aug- 12 Sep- 12 Oct- 12 Nov- 12 Dec- 12 Jan- 13 Source: Institute for Supply Management (ISM), Markit. Figure 13 tracks prices and daily inventories across the LME, the SHFE and Comex from January 2011 through March 15, In November 2012-March 15 inventories rose 69 percent from 489 kmt to 826 kmt, due mostly to dwindling demand from Europe and China. Copper prices, however, averaged 360 /lb. in the first quarter. FIGURE 13: SPOT PRICE AND EXCHANGE INVENTORIES Source: Cochilco, based on London Metal Exchange EUROZONE Continuing the slide posted in December, manufacturing shrank 2.1 percent in January, clearly showing that the region remains far from picking up. Manufacturing in France has deteriorated steadily since August, proof that the crisis is impacting leading regional economies. Regional GDP is expected to fall 0.2 percent in 2013 and grow 1 percent in Germany and France, the region s top economies, are expected to grow 0.6 percent and 0.3 percent in 2013, respectively, while Italy and Spain should contract 1 percent and 1.5 percent, respectively. 10

13 UNITED STATES Manufacturing slowed down to 2.9 percent in December and 2.1 percent in January. Business investment remains down, driven by uncertainty over ongoing spending cuts. Oil and gas remains the most dynamic sector. The IMF expects the economy to grow 2 percent in 2013 and 3 percent in CHINA Manufacturing in January-February grew 9.9 percent, down from 11.4 percent the year before, the difference mostly attributable to a longer New Year s holiday. Industrial growth in China is a mixed bag. While electricity and oil are down year-on-year, automobiles, iron and cement have made important strides. As of February 2013, Consensus Forecast was expecting Chinese manufacturing to grow 10.1 percent this year and 11.1 percent in Exports in February were up 21.8 percent, besting the expected 10 percent. Significantly, housing prices turned around in the third quarter and gained 2.1 percent in February alone, prompting measures designed to discourage investment buying. The IMF expects the Chinese economy to grow 8.2 percent and 8.5 percent in 2013 and 2014, respectively. The official growth target for 2013 remains at 7.5 percent. FIGURE 14: GROWTH ACROSS LEADING COPPER CONSUMER COUNTRIES (%) p 2013 e 2014 e Source: IMF, January

14 3.2.3 REFINED COPPER DEMAND: GLOBAL ESTIMATES World Metals Statistics data as at February 2013 shows that refined copper demand stood at 20.6 million MT in 2012, up 4.7 percent year-on-year. China led the way with 8.8 million MT, up 11.7 percent over the year before. Both figures exceeded our January forecast. China s refined and copper concentrate purchases, including 3.4 million MT of refined copper, were up 20 percent to 5.8 million MT in China s refined and copper concentrate purchases were up 27.5 percent and 6.8 percent in , respectively. The difference is credited to China s significant 49.8 percent increase in smelting capacity, which includes scrap copper (Figure 15). FIGURE 15: CHINESE REFINED AND CONCENTRATE PURCHASES (MILLION MT) Source: National Bureau of Statistics of China. Also showing significant increases in refined copper demand in 2012 are Mexico (20%) and Taiwan (13%). In contrast, demand in Germany, Europe s largest consumer, slipped 12 percent. Table 1 shows consumption across the twelve largest copper consumer countries, which account for 82 percent of global demand. TABLE 1: LEADING REFINED COPPER CONSUMER NATIONS (KMT) Source: World Metals Statistics. 12

15 Table 2 shows expected refined copper demand in 2013 and Expected demand for 2013 is 20.8 million MT, above our 20.3 million MT January estimate. World demand should increase 1.4 percent over 2012, notably in China (5%), India (4%), and Brazil (4%). Demand over 2012 is expected to drop 7.9 percent in the eurozone and 1 percent in each of Japan and South Korea. Expectations for 2014 are more optimistic. World demand should grow 3 percent to 21.5 million MT, with China (5%), India (5%) and Brazil (4%) accounting for most growth. Among leading consumers, Russia stands alone with a 0.5 percent drop. TABLE 2: ESTIMATED REFINED COPPER DEMAND, (KMT) Source: Cochilco, based on ICSG, Wood Mackenzie, and World Metals Statistics. Country shares in Figure 16 are largely consistent. Comparing 2012 and 2014, China increases from 43 to 46 percent, the eurozone drops from 13 to 11 percent, and South Korea falls from 4 to 3 percent. The United States is flat at 9 percent. FIGURE 16: REFINED COPPER COUNTRY SHARES (%) Source: Cochilco. 13

16 As Figure 17 shown, although demand presents few changes, it is clearly stronger in FIGURE 17: EXPECTED INCREASES IN REFINED COPPER CONSUMPTION, (KMT) )-'''$!"#$,''$ *''$ (''$ "''$ '$ %"''$ %(''$ (("$ (*($ %#&'$ %"'*$ '$ ()$ ),$ ),$ %)*$ %)'$ '$ %#'$ %+$ +$ %*''$ China Eurozone U.S. Japan South Korea Source: Cochilco p 2013 e 2014 e %#+$ %#$ %#$ %"&$ '$ ($ %)!,$ ),$ "($ &)$ ),$ )!$ '$ "$ ($ ***$ *##$ ",)$ Russia Taiwan India Brazil Turkey World EUROZONE REMAINS IN RECESSION The relentless contraction facing most eurozone economies after the subprime mortgage crisis has driven copper demand down, with the drop in 2013 standing at an estimated 7.9 percent. Manufacturing has been in a tailspin since November 2011 and the manufacturing PMI is within contractionary territory since August Both public and private infrastructure spending are down, further cutting into demand for copper. The energy sector is alone in building new infrastructure as it moves to replace obsolete facilities U.S. GROWTH REMAINS SLUGGISH GDP, inflation and unemployment continue to perform within range but Congress has failed to avert federal spending cuts and uncertainty on the fiscal debt ceiling (a decision is expected in May) continues. Building permits stalled in November-January, which compares unfavorably to prior conditions. In addition, manufacturing is down over the rates posted prior to November Year-on-year, manufacturing grew 3.4 percent in November and 2.1 percent in January As such, copper demand in the U.S. should stay mostly flat in Figure 18 below shows monthly building permits since January

17 FIGURE 18: BUILDING PERMITS (THOUSANDS) '+&$ '&&$ "+&$ "'&$ "!"$ '&&$ '&'$ '&#$ "&&$ %+&$ %&&$!+&$!"#$ %&%$ %!'$ %()$ %"#$ %!&$ "**$ "&*$!&&$,-./*($ 012/*($ 3-4/*($ 564/*($ 3-7/*($,8./*($,89/*($ 58:/*($ ;16/*($ B1=/*($,-./*)$ Source: U.S. Department of Commerce CHINA: COPPER DEMAND REBOUNDS SLOWLY While Chinese growth should recover in 2013, demand for copper is not expected to keep pace. Strong inventories built up in 2012 portend a significant drop in purchases in coming months, which would in turn translate into higher exchange inventories. Copper consumption may also be impacted by real estate market restrictions intended to curb speculative price increases. Expectations of higher inflation following the 3.2 percent annualized rate posted in February could drive up loan rates and further slow down the economy JAPAN IN THE DOLDRUMS Accounting for most of the protracted recession and loss of competitiveness facing Japan is a stout yen. With manufacturing posting negative results since July 2012, copper consumption has levelled off at about 980 kmt. In recent months the yen has depreciated against the U.S. dollar as the government of Prime Minister Shinzō Abe tries to steer the economy out of the doldrums. 3.3 GLOBAL REFINED AND MINED COPPER SUPPLY GLOBAL MINED COPPER OUTPUT The global mined copper output in 2012 stands at an estimated 17 million MT, a 4.4 percent increase over 2011 and higher than our 16.6 million MT January estimate. In 2013 the global mined copper output should rise 3 percent to 17.5 million MT, led by increases in Mongolia (15.3%), Congo DR (9.9%), Brazil (9.7%), and Indonesia (8.0%). Production in Australia, Russia and Iran should be flat. Output in leading producer countries is not expected to decline. 15

18 The global copper supply does not improve significantly in Production should expand 3 percent to 18 million MT, led by Mongolia with a strong 20 percent, Brazil with 9 percent, and Congo DR with 8 percent. TABLE 3: ESTIMATED MINED COPPER SUPPLY, (KMT) Country p 2013 e 2014 e ± ± % ± ± % ± ± % kmt kmt 2012/2011 kmt 2013/2012 kmt 2014/2013 Chile 5,263 5, , , China 1,267 1, , , Peru 1,235 1, , , U.S. 1,138 1, , , Australia Zambia Russia Canada Indonesia Mexico Congo DR Kazakhstan Poland Iran Brazil Mongolia Other 1,401 1, , , World 16,306 17, , , Source: Cochilco, based on ICSG, Wood Mackenzie, and World Metals Statistics CHILEAN MINED COPPER SUPPLY, Chilean mined copper production stood at 5.43 million MT in 2012, a 3.3 percent increase over Major milestones included Escondida s getting production back up to over a million tons plus increases at Los Bronces, El Abra, and Esperanza. Mined copper production should expand 2.6 percent to 5.58 million MT in 2013, an additional 144 kmt over This estimate is based on Codelco production rising 3.4 percent following the Q4 commissioning of the Ministro Hales Mine, expected to contribute an additional 10 kmt. Production at Collahuasi is expected to rise 9.9 percent to 310 kmt while Esperanza s should increase 15.6 percent from 173 kmt in 2012 to 200 kmt in Production at Escondida is expected to level off at about 1.1 million MT. Production at Caserones, slated to produce its first oxide cathodes in March 2013, should stand at some 2 kmt. In 2014 the mined copper output should stand at 5.73 million MT, up 2.6 percent over the estimate for 2013, for an additional 147 kmt. Production by Codelco s Radomiro Tomic, Chuquicamata, Salvador, Teniente, Andina, and Gaby mines should diminish due to declining oxide production by Radomiro Tomic and Gaby. That said, the additional 50 kmt contributed by the new Ministro Hales Mine should reduce the Codelco drop to only 1.6 percent. Collahuasi s continued recovery should result in production of 350 kmt, a 12.9 percent increase over 2013, while the new Caserones concentrating plant should contribute 70 kmt. 16

19 3.3.3 GLOBAL REFINED COPPER SUPPLY Mined copper estimates for 2013 and 2014 in Table 3 suggest that the global refined copper supply from both primary and secondary sources should stand at million MT in 2013 and million MT in 2014, up a respective 2.7 and 2.4 percent over our January estimates. TABLE 4: GLOBAL REFINED COPPER PRODUCTION ESTIMATES, (KMT)!"##!"#!$%!"#&$'!"#($' )*+,-*.$/'0+1'2$34%%'* #56#"( #56575 #76#78 #7659! :/ #!67!! #&6#7( #&6859 #&6975 :; &6&<! &68"! &65"7 &67#8 ='>412-*.$/'0+1'2$34%%'* &68(5 &65<9 &67!" &6<5"?4@-A #9658"!"6&58!"6<98!#688! Source: Cochilco, based on Wood Mackenzie and ICSG Copper Bulletin. 3.4 WORLD REFINED COPPER SUPPLY AND PRICE PROSPECTS REFINED COPPER MARKET - WORLD BALANCE The refined copper market balance in Table 5 suggests moderate surpluses of 66 kmt in 2013 and 89 kmt in This assumes demand growth of 1.4 percent in 2013 and 3 percent in 2014, down slightly over our January estimates. Reinforcing expectations of lower consumption in China are housing market restrictions and the rise in annual inflation reported in February, which could portend a tightening of monetary policy in coming months. Supply growth rates of 2.6 and 3.1 percent in 2013 and 2014 are 0.2 and 0.3 percent lower than our January estimate. While the supply in 2012 was higher than first estimated due to increases by China, Mexico, and Congo DR, this would not be the case in TABLE 5: REFINED COPPER: ESTIMATED GLOBAL MARKET BALANCE, (KMT) kmt p 2013 e 2014 e!"#$%"&'()*#+),'-.//)" :6 9:3 9:3 ;)<.+,%"&'()*#+),'-.//)" = =13 >.?%@';A//@& = B 9:3 9:1 8:1 9:0 C)$%+, 072== = 832= B 9:4 0:4 9:3!"#$%&'(")"*+%,-.-,/ <D#@<.'EF?#$%?)'GHI@J:K Source: Cochilco, based on Wood Mackenzie and ICSG Copper Bulletin. 17

20 3.4.2 COPPER PRICE PROJECTIONS The refined copper balance has not changed significantly since our January estimate. As such, we stand by our projections of 357 /lb. and 332 /lb. for 2013 and As noted in Section 3.2.2, economic and political developments in the United States, Europe and China in January-March have the potential to impact future copper prices. These include: Additional eurozone members requiring financial aid. The political crisis in Italy. Failure by U.S. leaders to resolve the federal debt ceiling issue. Housing market restrictions and higher inflation in China. Our price projections are conservative relative to the market. A Consensus Forecast poll conducted in February expects 2013 prices to stand at 377 /lb., ranging from a low of 361 /lb. to a high of 388 /lb. The outlook for 2014 is 379 /lb., ranging from a low of 322 /lb. to a high of 432 /lb. TABLE 6: CONSENSUS FORECAST ESTIMATES OF COPPER PRICES IN ( /LB.) 2013 e 2014 e Average High Low Entidad 2013 e 2014 e Entidad 2013 e 2014 e Euromonitor International Oxford Economics ANZ Macquarie Bank Econ Intelligence Unit Deutsche Bank Morgan Stanley BoA Merrill Lynch HWWI China Int'l Capital Corp Commonwealth Bank Credit Suisse RBC Capital Markets CPM Group Wilson HTM Barclays Capital Metal Bulletin Research BNP Paribas Standard Bank Scotiabank Citigroup IHS Global Insight CIMB Group Source: Consensus Forecast. 18

21 BOX 1 DUTCH DISEASE: THE RISK OF HIGH COPPER PRICES Of late, scores of analysts have been sounding the alarm about systemic risk lurking underneath high copper prices. Some of the most alarmist in their number are certain that the dreaded Dutch disease has already taken up residence in Chile. What exactly is Dutch disease? This is the rough dynamics of Dutch disease: An authoritative opinion on the presence of Dutch disease in Chile requires a review of all three factors. Chart 1 shows copper prices ( /lb.) relative to the real exchange rate in While real exchange rates have indeed reacted to rising copper prices, the response has been several orders of magnitude lower. Real exchange rates currently stand at levels similar to late 2005, when copper traded at under 200 /lb. Therefore, gauging the impact of exchange rate appreciation requires a review of non-mining sector performance. To do this, first we tabulated real exports to measure performance, isolating the price effect on the premise that the negative effects of exchange rate appreciation should translate into lower exports. Yet, as shown on Chart 2, agricultural and manufacturing exports have actually outperformed the mining sector, implying an inelastic reaction by exports to changes in the real exchange rate and/or that the negative effects of appreciation have been offset by productivity gains across non-mining tradable sectors. Chart 2 Chart 1 Source: Cochilco, based on Central Bank of Chile. Building on the above, we tracked productivity across all three sectors in order to gauge changes and the potential competitive impact of exchange rate appreciation. Source: Cochilco, based on Central Bank of Chile. While deviation from the median of the real exchange rate (appreciation) does not appear particularly relevant, the sensitivity of non-mining exporter sectors to changes in the exchange rate is not known. As such, an impact on competitiveness across other tradable sectors cannot be ruled out. Surprisingly, as shown on Chart 3, industry and manufacturing again outperform mining. This appears to have partly offset the negative effects of exchange rate appreciation and could account for those sectors failing to lose competitiveness. 19

22 The above suggests that rising prices have negatively impacted productivity in the mining sector. This stands to reason, as higher commodity prices increase the allure of projects whose low grades make them harder to operate. In addition, when demand is high inputs and human capital become scarce, all of which translates into higher costs that impinge on productivity. Chart 3 Source: Cochilco, based on ECLAC. Agriculture and industry on right axis. The evidence shows that Chile does not suffer from Dutch disease, insofar as real exchange rate appreciation has not impacted competitiveness across agriculture and manufacturing. From the start of the copper price bull run through Q4 2012, real exports by both these sectors grew about 40 and 20 percent, respectively, while mining exports remained constant relative to the base year. Key to maintaining and improving competitiveness across agriculture and manufacturing have been productivity gains posted throughout the period under review (comparable data is available through 2009). The difference with the mining sector, where productivity has declined since the start of the bull run, is clear. To sum up: 20

23 BOX 2 CHILE AND THE WORLD: EXPLORATION EXPENDITURES The Metals Economics Group (MEG) recently released a report on exploration budgets in a range of countries, with data to At the start of the subprime mortgage crisis of 2008, Chile ranked 7 with US$522 million. In 2012 it ranked 5 for the second year running, with US$1.03 billion. Table 1 &'()*+,-.*/ ?;"$5#@AB;C5D5;#21!""#!""$!"%"!"%%!"%!!"#"$" %&'() *&)+, %&%*, )&*-. )&%(, /0123"45" *&.6. *&-.- *&,*' %&%++ %&,*' 7898 *&-**,%' ''6 *&((6 *&+6(!:54;,%% ),',(, ')* *&-), <;30 +.% ('.,.* 6+( *&-%, =>34$ *%&+-* 6&)*+ *-&+6. *6&%(, %-&,)* In the period, the Chilean exploration budget grew 98 percent versus 63 percent for the rest of the world. %,($!'($!%($ *($ "($ Chart 1!"#$%&'(%)*+,-./0* -%,,*$.$!,,/$ %,,*$ %,,)$ %,!,$ %,!!$ %,!%$ $ :1$ ;#<#$ Such an expansion is all the more remarkable considering that 68 percent is going to base metals at a time when gold exploration is attracting most of the budget elsewhere. Indeed, gold s share of the world exploration budget rose from 39 percent in 2008 to 47 percent in 2012, while base metals fell from 41 to 31 percent. In Chile, gold s share of exploration budgets rose from 21 to 25 percent in the same period while base metals dropped from 77 to 68 percent, with copper accounting for over 90 percent of the total. Although Chile ranks 14 among world producers, gold exploration is becoming increasingly attractive as reserves of 3,900 tons place Chile in fourth place worldwide. A vast portion of these reserves are contained in copper sulfide deposits, making production expensive. Still, Chile compares well with countries such as Canada, which boasts the largest gold exploration budget but whose reserves were ranked 14 in 2013 by the U.S. Geological Survey. The exploration budget noted in the MEG report attests to Chile s strong geological potential and helps contrast other reports on the matter. For example, the Fraser Institute s annual poll of mining executives and consultants on geological potential and exploration investment policy. On the latter, Chile drops from place 18 to 23 in the 2012 report. Poll respondents cite concerns about the legal system, regulatory inconsistencies and duplication, and uncertainty over management, interpretation or application of existing regulations. On the former, Chile drops from fifth to eleventh place. Geological potential is assessed based on both available country databases and opinion on investment-friendliness. To judge if Chile has the potential to attract exploration investment and keep growing as a mining country, both reports should be reviewed. The hard data provided by exploration companies should help complement the perceptions of players. 21

24 IV. UNREFINED COPPER MARKET 4.1 GLOBAL SMELTER PRODUCTION Smelter production in 2013 and 2014 should grow 2.2 and 2.0 percent to and million MT, respectively. As in previous years, accounting for most increases is Asia, where China is continually expanding its smelting capacity. TABLE 7: GLOBAL COPPER SMELTER PRODUCTION, (KMT) C, 4061C, 4065C,!"#$%&'(#) *(++,",)&,!"#$%&'(#) *(++,",)&,!"#$%&'(#) *(++,",)&,!"#$%&'(#) *(++,",)&, -+"(&. /0/ 12 /30 / ( : / : 65: ;%"#<, : = >,"(&.9 47/58 = : // =1?&,.)(. 543 /1 135 =1: :0 6472: : / : E#'.BC-F.(B.AB, G 6H3 1H4 4H4 4H0 Source: Cochilco, based on Wood Mackenzie, ICSG and CRU. 4.2 GLOBAL CONCENTRATE PRODUCTION Concentrate production rose 2.8 percent In 2012 over the year before. Chile led these increases with the Escondida production recovery and the Esperanza, Andina Phase 1 and Los Bronces expansions. Both China and Mexico also had significant increases. Production in 2013 and 2014 should increase 2.3 and 1.8 percent, respectively, following start-up of the Oyu Tolgoi project in Mongolia and expansions in Congo DR. Chile will contribute new production both years after Collahuasi recovers fully, Esperanza ramps up production and Sierra Gorda and Caserones come on stream. TABLE 8: GLOBAL CONCENTRATE PRODUCTION, (KMT) *- 9418*- 9415*-!"#$%&'(#)* +(,,-"-)&-!"#$%&'(#)* +(,,-"-)&-!"#$%&'(#)* +(,,-"-)&-!"#$%&'(#)* +(,,-"-)&-.,"(&/ (/ : ; < 16 =%"#>- 1328< :11< ?-"(&/ ; 63; ; : :14 A%B'#'/C 1839<< ;9 1830; < D#)&-)'"/'-*E# ; F#'/C*.G/(C/BC- 193<< ;08 H 1I0 9I< 9I8 1I< Source: Cochilco, based on Wood Mackenzie, ICSG and CRU. 22

25 4.3 CONCENTRATE BALANCE AND TREATMENT CHARGES (TC) As in previous years, the concentrate market is expected to remain in a deficit condition through 2013 and In Asia the shortfall should ease due to smelter inventory buildup. TABLE 9: COPPER CONCENTRATE GLOBAL MARKET BALANCE, (KMT) *- 3705*- 370;*-!"#$%&'(#)* +(,,-"-)&-!"#$%&'(#)* +(,,-"-)&-!"#$%&'(#)* +(,,-"-)&-!"#$%&'(#)* +(,,-"-)&-.,"(&/ (/ 25:768 2;48 25:3< : < 25:40< 2031 =%"#>- 2<07 2< << ?-"(&/9 5: :< : : < <7 247 A#'/B 658 2;74 67< ; 230 C#)&-)'"/'-*D# ;07 ;01 ;3< E?-B'-"*D# < 3<3 F/B/)&- 20; 26; Source: Cochilco, based on Wood Mackenzie, ICSG and CRU. Although smaller than anticipated in January, the shortfall expected in 2013 and 2014 should translate into lower treatment charges for supply contracts one year and up, in line with the $70/MT posted in January-February. FIGURE 19: TREATMENT CHARGES (TC), SPOT AND SUPPLY CONTRACTS ($/MT) '#!" '!!" 2469":6*9.);9<" =**0)1"20441/":6*9.);9<" &!" %!" $!" #!"!" ()*+!," -).+ -)/+ (01+!," 234+!," 567+ ()*+'!" -).+ -)/+ (01+'!" 234+'!" 567+ ()*+''" -).+ -)/+ (01+''" 234+''" 567+ ()*+'#" -).+ -)/+ (01+'#" 234+'#" 567+ ()*+'8" Source: CRU Raw Materials, February

26 BIBLIOGRAPHY Consensus Forecast Economic Inc. Asia Pacific Consensus Forecasts. By subscription. December Consensus Forecast Economic Inc. Consensus Forecasts. By subscription. December Claro, S., Dutch Disease Symposium, The School of Public Policy, University of Calgary, March CRU International Limited, CRU Copper Raw Materials Monitor, Concentrates, Blister and Scrap. By subscription. February Energy & Metals Consensus Forecast, February International Copper Study Group, Copper Bulletin,. Markit PMI Index evolution series, available from Platts Metals Week. By subscription.. Klapp, F., Lagos, L., Precio del cobre y enfermedad holandesa en Chile. Libertad y Desarrollo, Serie de Informe Económico N 225. October Reuters Information System. Copper Prices and Metal Exchange Stocks. Wood Mackenzie Research & Consulting, Metals Market Service, Monthly Update. By subscription. December Wood Mackenzie Research & Consulting, Metals Market Service, Copper Mining Database By subscription. December Wood Mackenzie Research & Consulting, Metals Market Service, Long-Term Outlook. By subscription. December Word Metal Statistics. By subscription. March

27 A Cochilco Publication Prepared By Daniela Rojas S. Jorge Valverde C. Víctor Garay L. Director, María Cristina Betancour March