Asia could be key for copper supply constraints

<p>A lot of the discussion around copper tends to be focused on demand – Chinese consumption patterns and overall global growth. The spot price has […]</p>

A lot of the discussion around copper tends to be focused on demand – Chinese consumption patterns and overall global growth. The spot price has fallen back towards US$3.50/lb where it seems to be finding support. A further selloff will find some very strong support at around US$3.30/lb and a rise from here will struggle to see US$-3.60-65/lb being broken. These levels have held for much of 2012 and discussed extensively in City Index’s commentary.

While the market is overly focused on demand, anecdotal evidence from suppliers is also worth monitoring and this is something we have been keeping an eye on for some time. The argument by the bulls is the key copper producers are making a very large margin at current levels and so the supply side is in a strong position at current prices, even with the recent drop. Production costs for most copper producers are distorted by the credits they get from other minerals that work their way into the production process. High grade copper is usually synonymous with silver and gold, so by-credits distort the true picture.

What we look for is firstly guidance on capital costs for new deposits and production expansion; and secondly, large high grade deposits working their way onto the market. Today’s quarterly production report from Australian producer Pan Australia (ticker PNA) indicates some good news on both fronts. The company has managed to ramp up production to ensure it maintains its full year guidance; it has some ambitious comments around new projects and experiencing higher than expected grades at its flagship project. The comments are contrary to what most other copper producers are reporting, mainly those focused in developed mining hubs, such as Australia and Chile.

PNA’s key projects are based in Laos – a country bordered by Burma and China to the northwest, Vietnam, Cambodia and Thailand along its other borders. The flagship Phu Kham project has a 12 year mine life so it is not exactly one of the largest global ore bodies but the region is highly prospective. As other ore bodies in the region pursue development, traders should closely watch guidance on production costs and grades.

A flood of copper onto the market is unlikely over the next five years, given the difficulty in getting large ore bodies to the development stage before they actually start mining. Rio Tinto is still forecasting a big spread between known new supply from committed projects versus known demand from committed industrial projects. In the medium term, positive news out of Asia on the mining front might encourage the majors to shift their project pipeline, particularly if we see prolonged spot copper prices above US$4/lb.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.