Copper: an outlook on global supply and demand

Transcription

1 RISK FOCUS MINING BULLETIN NOVEMBER 2017 Copper: an outlook on global supply and demand Copper is currently in a supply deficit which is likely to increase over the next three years. Prospects of a Chinese economic recovery, rising demand from electric vehicle manufacturers and US infrastructure plans announced following the election of President Trump are all driving copper demand. Meanwhile, labour disruptions, declining ore grades and a lack of new capacity are constricting supply, thereby resulting in a tightening market. In our latest bulletin we bring together some of these indicators and assess their insurance implications. Supply side issues took the centre stage in Q when production was disrupted in some of the major copper mines globally. These disruptions, together with capacity constraints, declining ore grades and delays to new projects have aggravated supply concerns. According to The International Copper Study Group (ICSG), global copper production is estimated to have declined by nearly 3% in the first five months of Chile, the world s biggest copper producing country, registered a 10% decline in production due to 43 days strike at Escondida (the world s largest copper mine) and lower output from Codelco mines while the 21 day strike at Peru s Cerro Verde mine also disrupted the copper output. In Indonesia, ongoing disputes between Freeport McMoran and the Indonesian government over the company s contract to work in the country saw the government enforce a temporary ban on concentrate exports from the Grasberg mine in January The ban was lifted three months later with the government granting Freeport a six month permit allowing them to resume copper exports. However, as a result of the company furloughing thousands of workers earlier in the year, violent protests erupted in May. The Grasberg mine itself is estimated to contribute ~3% of the global copper supply and the ongoing disputes in 2017

2 2 MINING BULLETIN Risk Focus November 2017 are expected to have seen a 5% decline in production. In October 2017, following months of negotiations, Freeport McMoran relinquished a 51% share to the mine to the Indonesian government marking a victory for President Joko Widodo as the country paves the way for a new era of resource nationalism implementing new mining legislation that requires foreign companies to divest a majority stake in their Indonesian assets. In the first half of 2017, Canada and Mongolia also registered declines in production of 20% and 21% respectively, primarily due to lower ore grades. US production declined by nearly 11% primarily due to lower ore grades, reduced mining rates and unfavourable weather conditions. COPPER PRICE ANALYSIS Steep capital expenditure cuts since copper prices slumped in 2014 has negatively affected the development of the copper project pipeline, which according to Bloomberg Analysis, will take some time to recover. This has been exacerbated where existing producers have prioritised the production of their most profitable tonnes, rather than maximizing volumes, in order to alleviate pressure on their balance sheet. This dynamic does not appear to be set to change in the short term. Expansions and new project plans are reported to be facing reluctant lenders, political disputes and technical obstacles such as restrictions in water licencing or electricity allocation resulting in project delays. According to CRU Group, a UK research company, only six major projects to build new mines or expand existing operations will be completed by COPPER PRICE VS US DOLLAR INDEX LME Copper Price (USD/mt) 7,500 7,000 6,500 6,000 5,500 5,000 4, US Dollar Index 4, Q Q Q Q Q Q Q Q3 75 SOURCE: BLOOMBERG

3 Risk Focus 3 COPPER MINE PRODUCTION BY REGION (2016) COPPER USAGE BY END USER SECTOR (2016) 5% 10% 12% 30% 41% 13% 31% 14% 15% 17% Oceania Africa Europe 12% Industrial Equipment Transport North America Asia Latin America Infrastructure Building Construction SOURCE: INTERNATIONAL COPPER STUDY FACTBOOK 2016 SOURCE: INTERNATIONAL COPPER STUDY FACTBOOK 2016 COPPER DEMAND BOOST The demand outlook for the red metal remains positive with expectations of a recovery in Chinese demand. This has been driven by President Trump s plans to boost spending on infrastructure and construction, depreciation of the US dollar and the rising use of copper in electric vehicles and other electrical applications. In anticipation of this rise in demand, the copper market welcomed the election of Trump with a price rise of nearly 2% in late 2016 which marked its highest level since September The 10 year, USD 1 trillion infrastructure plan revealed by Trump aims to revamp the nation s infrastructure network with prospective investments in transportation, energy infrastructure and other traditional types of projects. However, experts have expressed mixed views on the real impact of the US infrastructure plan on the global copper demand so the primary boost is expected to come from the recovery of the Chinese economy as the country continues its transitions towards a domestic demand driven economy. The ICSG expects world refined copper usage to increase nearly 2% in 2017 and 2018 in the wake of better prospects for global economies, particularly China, where copper is essential to economic activity and rising technological adoption in society. China s retail and industrial sector witnessed growth of nearly 10.4% and 6.9% y-o-y respectively in first half of Growing use of copper in China s power grid, which accounts for nearly half of China s total copper requirement, along with healthy growth of high-technology and equipment manufacturing industries, has principally driven demand for copper. China s ambitious USD 4 trillion One Belt, One Road (OBOR) infrastructure development plan, aimed at developing trade corridors across Asia, Europe, Africa and Middle East will further drive demand. IMF has recently revised China s GDP growth forecast for 2017 and 2018 to 6.7% and 6.4% respectively, reflecting the high levels of public investment in the country which augurs well for the steady and continued copper demand in the country, one of the biggest consumers of the metal globally. Other notable factors which are expected to drive the demand of the red metal include the rising production of electric cars, which use four times the amount of copper than a vehicle with a traditional combustion engine. According to International Copper Association, copper demand from electric vehicles is expected to be nine times higher by 2027 from the current level of 185,000 tonnes. In addition, depreciation of the US dollar in comparison to the currencies of Peru, Chile and China (the key copper producers) could also lead to higher demand for copper from these producers in turn translating to higher prices. Tightening of supply is further evidenced from the fall in copper inventories at London Metal Exchange and Shanghai Futures Exchange warehouses.

4 4 MINING BULLETIN Risk Focus November 2017 COPPER DEFICIT As the global copper deficit intensifies and the price outlook remains strong, miners can be seen to focus on the expansion and development of new projects to meet increased demand. Production from brownfield expansions at Escondida in Chile, the restart of Glencore s African copper operations, First Quantum Minerals new Cobre Panama mine and OZ Minerals construction of the Carrapateena copper mine in South Australia are expected to come online and increase output in the future. Some metals and mining analysts remain optimistic on copper and anticipate that the significant copper deficit may continue, a view supported in a recent McKinsey Global Institute report which signalled strong growth for copper over the next two decades and alongside a depletion of copper ores after 2025 further exacerbating constrained supply. On balance we see a strong outlook for copper and expect to see an increase in both greenfield and expansion projects getting the green light in the coming months. 4,00,000 2,00,000 0 Metric Tons -2,00,000-4,00,000-6,00,000-8,00, E 2017E 2018E 2019E 2020E Global Copper Deficit SOURCE: RBC CAPITAL MARKETS *E indicates Copper Balance Forecasts INSURANCE MARKET IMPLICATIONS Pricing Volatility: A welcome uplift in copper prices, combined with continuing cost discipline, has resulted in an increase in business interruption (BI) exposures for copper clients in With price changes occurring rapidly it is critical that adequacy of BI protection, including dependencies on certain customers and suppliers, is reviewed at least quarterly to ensure policy coverage keeps pace with market movement. Construction Risk: The risk profiles of copper construction projects vary depending on whether they are greenfield or an expansion or being managed by an owner or a chosen contractor. For expansion projects the effect of damage from construction work to existing production facilities can be severe with insurance recovery required across a number of policies. Mining companies should review these specific risk considerations with their broker at the early stage of the project design phase to ensure they have robust policies in place.

5 Risk Focus 5 MAJOR COPPER MINES CLOSURE IN 2015 AND 2016 COMPANY MINE NAME COUNTRY ANNUAL PRODUCTION LOSS (TONNES) COMMENTS Freeport Miami USA ~26,000 Closed in 2015 until end of 2017 Freeport Tyrone USA ~43,000 50% cut in output Freeport El Abra Chile ~83,000 50% cut in output Asarco Ray SXEW USA ~30,000 50% cut in output KGHM McCreedy West Canada ~20,000 Closed in September 2015 Glencore China Non-Ferrous Metals Corp. Katanga Demographic Republic of Congo ~113,00 Baluba Zambia ~18,000 Closed in 2015 Antofagasta plc Michilla Chile ~30,000 SOURCE: BLOOMBERG Suspended in September 2015; to restart in 2018 Closed in 2015, Sold to Haldeman Mining Co SA

6 6 MINING BULLETIN Risk Focus November 2017 The JLT Mining team is a specialist broking division, with an exclusive focus on risks spanning the entire mining project lifecycle. We manage a large and established client base of mining companies, contractors, traders, and financiers, across a range of commodities and regions. Acknowledged as placement leaders, our brokers know how to position complex mining risks to deliver the broadest coverage terms, for the best possible rate. We deliver local service, but with global reach, by leveraging JLT Group s network of 10,000 specialists across 135 countries. Our in-house claims division has collected over GBP 3 billion since 2010, while our consultancy team helps clients identify, understand, and mitigate risk more effectively. Our objective is simple: to provide a competitive advantage by enhancing our clients resilience and empowering them to take risks. CONTACTS Harry Floyd Partner, JLT Specialty +44 (0) harry_floyd@jltgroup.com Jardine Lloyd Thompson Group plc, incorporated and registered in England and Wales. Registered Office at The St Botolph Building, 138 Houndsditch, London, EC3A 7AW. Registered number November This document is compiled for the benefit of clients and prospective clients of companies of the JLT group of companies ( JLT ). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property. If insurance and/or risk management advice is provided, it will be provided by one or more of JLT s regulated companies depending on the territories requiring insurance and/or risk management advice.