copper market outlook: transitioning to...

Copper market outlook: Transitioning to deficits

Prepared for:

Copper to the World Conference,

Adelaide Convention Centre, 27th June 2017

Prepared by:

Vanessa Davidson,

Director of Copper Research & Strategy

Structure of Presentation

www.crugroup.com 2

Demand Outlook: Period of transition as China slows2

Supply Outlook: Still in need of more supply3

Current Copper Market: Deficits delayed but still expected 1

4 Investment Cycle: Have we moved to the upside of the cycle?

http://www.crugroup.com/

Price has recovered from the lows but next step-up remains elusive

Mine output losses*, ‘000t H1 2017

Escondida 233

Grasberg 253

Other 66

Total 552

www.crugroup.com 3Data: CRU, LME

4,000

4,500

5,000

5,500

6,000

6,500

01 16 04 16 07 16 10 16 01 17 04 17

New range established for the LME price

LME 3-M, $/tonne

Production losses were sizeable in H1

*Estimated

Spot TC’s pick-up unexpectedly

60

70

80

90

100

110

120

130

140

01 14 07 14 01 15 07 15 01 16 07 16 01 17

Spot TC’s (Chinese smelter), $/t

4

5

6

7

8

9

10

0

50

100

150

200

250

12 13 14 15 16 17

CIF Rotterdam (LHS)China imported (LHS)US East Coast (RHS)

Cathode premiums remain depressed


Refined copper market insulated by scrap and stocks

www.crugroup.com 4Data: CRU, LME, Comex, SHFE *Western Europe, North America and North East Asia

0

500

1000

1500

2000

01 12 01 13 01 14 01 15 01 16 01 17

LME Comex SHFE Chinese Bonded

Cathode stocks are still sizeable despite recent drawdown

‘000t

Scrap availability has surged this year…

-1.4%

1.6%

-0.1%

0.5%

-1.0%

6.3%

-2%

0%

2%

4%

6%

8%

2012 2013 2014 2015 2016 2017

Global growth in direct use scrap, %

Blister stocks were high at start of 2017

…depressing global refined copper demand

-1%

0%

1%

2%

3%

4%

World China Eur/Am/Asia* Other

Semis production Refined consumption

Cu consumption growth, 2017, %

0

500

1000

1500

2014 2015 2016

Smelter

Refinery

Change in Cu production by smelters & refineries, ‘000t

Blister

stock-

build


Medium term market deficits remain intact

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

400

500

2015 2016 2017 2018 2019 2020 2021

$/t’000t Cu

Balance forecast in April Balance forecast in June

Price forecast in April Price forecast in June

LME cash price and annual global refined supply/demand balance, 2015-2021

-200

600

Q1 Q2 Q3 Q4

Quarterly SD Balance, 2017

www.crugroup.com 5Data: CRU



www.crugroup.com 6






Global demand per capita still increasing steadily with GDP per capita

1.00

1.50

2.00

2.50

3.00

3.50

6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000

Global GDP per capita (US$ '000 - 2010 prices)

Refined copper consumption, kg/capita

The S-curve for copper

continues to grow at a steady

pace

By 2016, global refined copper

consumption had reached

3kg/capita

Over the years 1980-2016, a

$1M increase in GDP/capita, led

to a 0.22kg/capita increase in

refined copper consumption

globally

Can we expect this pace of

growth to continue?

S-curve for global refined copper demand, 1980-2016



There appears to be plenty of potential for further demand growth…

S-curve for refined copper demand by country, 2017

Italy

France

India

Canada

Indonesia

Russia

Thailand

S.Korea

Vietnam

Germany

UK

Mexico

Brazil

JapanChina

USA

Malaysia

Turkey

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0

GDP per capita (US$ '000 - 2010 prices)

kg/capita refined copper consumption 2017

Developing countries

Developed countries



…but China is set to slow which influences the global outlook

1.5

2.0

2.5

3.0

3.5

6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000


Global refined copper demand per capita,1980-2026

Cu consumption, kg / capita

0.0

3.0

6.0

9.0

0 2,000 4,000 6,000 8,000 10,000 12,000


China refined copper demand per capita,1980-2026

Cu consumption, kg/capita

0.0

2.0

4.0

6.0

8.0

15,000 20,000 25,000 30,000 35,000 40,000 45,000Global GDP per capita (US$ '000 - 2010 prices)

Developed world refined copper demand per capita,1980-2026


0.0

0.4

0.8

1.2

1.6

2,500 3,000 3,500 4,000 4,500 5,000 5,500


Developing world refined copper demand per capita, 1980-2026


Note: Excludes Russia and China

Demand per capita levels

off after 2021 reflecting

developments in China

Phase of heavy

industrialisation

ends

Per capita consumption growth

picks up but from low baseSome support from

developed world



Demand growth will increasingly be driven by world ex-China

Growth in global refined copper demand, %

Growth in world refined copper consumption and volume growth in selected 5-year periods

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2006-11 2011-16 2016-21 2021-26

China Rest of World

Absolute consumption growth in period, Mt

2.6Mt

2.9Mt

2.3Mt

1.2Mt

1.2%

2.5%

1.7%

2.3%2.1%

1.8% 1.8%

0.0%

1.0%

2.0%

3.0%

www.crugroup.com 10

1.0%

Data: CRU



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Our estimates suggest growth in mine output will be <1Mt in 2016-21

-1,000

0

1,000

2,000

3,000

4,000

5,000

2001-06 2006-11 2011-16 2016-21

SXEW

Concentrates

Dramatic increase in mine production

following heavy phase of investment

Growth in global mine production including EW, ‘000t Cu

Growth slows sharply due

to lack of new projects,

declining ore grades and

reserve exhaustion



Pipeline of large mine projects is thin: No new projects starting up in 2017

Copper mine projects with capacity of >100,000t/y; LOM annual copper production capacity; ’000t


0

100

200

300

400

Operating

Firm

Probable

Possible

2016 2018 2019 2020 2021


There are more smaller-sized projects being developed but it is still not enough

0

20

40

60

80

100

120

Yu

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Pha

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Mira

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To

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(C

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(Co

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Du

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Tsagaan S

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Ph

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Bystr

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Xie

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Kh

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Mo

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Bo

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Oxid

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To

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xp.

Firm Probable Possible

Projects and expansions due on-stream in 2017-21, with capacity of >50kt and <100kt, ‘000t of contained Cu



Codelco’s mine production static in next 10 years

Output from Codelco mines*, committed and uncommitted, ‘000tpy Cu; Mine project details to 2025

ProjectCapacity,

‘000t/y

Estimated

Start DateStatus

Chuqui’mata

Ripios35 Q2 2017 Firm

RT SBL

(bio-leach)30 Q3 2018 Probable

Chuqui’mata

Underground320 Q1 2020 Firm

Salvador

Extension

(Rajo Inca)

50 Q3 2022 Possible

El Teniente 430 Q3 2023 Firm

RT Sulphides 150 Q3 2024 Possible

Andina

Expansion II120 Q3 2025 Possible


1,000

1,500

2,000

2,500

3,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

CRU Forecast: Probable and possible projects

CRU Forecast: Existing mines and firm projects

Codelco's 2014 Business Plan

1730

*Note: Production quoted before disruption allowances

1740

2570

‘000 t


0

100

200

300

400

500

600

700

800

2010 2012 2014 2016 2018 2020 2022 2024

CRU Forecast: Jan 2015 CRU Forecast: Jun 2017

2014 Disruption: Dispute over

progressive export tax on concentrates

2017 Disruption: Dispute over

replacement of Contract of Work

(CoW) by Special Mining Licence

We are cautious on Grasberg but there could be upside potential

Grasberg output ‘000t Cu: Current vs. previous forecast (LHS); Annual average production (RHS)


0

100

200

300

400

500

600

700

800

1998-00 2000-05 2005-10 2010-15 2015-20 2020-25

2019 Transition: End of OP and

treatment of low grade stockpiles

2015 Disruption and Delay: Labour

dispute and DMLZ expansion project

delays

2022-25 Grades: Planned decline

in Cu ore grade at bloc cave



www.crugroup.com 17






Investment in the copper industry is highly pro-cyclical

0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

3,000

85 88 91 94 97 00 03 06 09 12 15

Price, RHSInvestment plans, LHS

Selected projects* investment plans**, ‘000t LME 3-month copper price, real (2016$)

Note: *35 projects with an average nominal capacity of 185,000t **based on nominal capacity and measured from date of first approval to first commercial production



Next phase of investment should begin as long as prices hold up

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0 2000 4000 6000 8000

<100t/y >=100t/y

Real (2016$) full economic costs for all projects due to start-up between 2017-2028, $/t

Cumulative production (‘000t Cu)

25% 50% 75%

LME 3 month price, H1 2017 average



In the meantime, prices set to rise faster than costs: Margins to improve

0

2,000

4,000

6,000

8,000

10,000

12,000

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Annual price range

Net of by-product cash cost, 75th percentile

LME Copper, Cash

LME cash price and 75th percentile net of by-product cash costs, $/t, 1983-2021

www.crugroup.com 20Data: CRU, LME


Copper prices have maintained the trading range established at the start of the year but have not found the

impetus to move higher

A combination of stocks of concentrate, blister, cathode and scrap have insulated the refined copper market

in 2017

Modest sized global surpluses are forecast for 2017 and 2018, before structural deficits emerge in 2020 on

the back of limited supply growth

Following the market downturn of recent years, the pipeline of major copper projects is extremely thin.

Many new projects will be needed by the mid-2020s

Global demand growth is expected to slow in the years 2016-26, as China’s heavy industrialisation phase

comes to an end

There is no new China about to take-off in the short term but global demand growth is nevertheless

anticipated

Producer margins are expected to improve to a level of $3,123/t by 2021 for the mine at the 75th percentile

of the cost curve; an increase of 154% compared to 2016

Have we moved onto the upside of the cycle?



copper market outlook: transitioning to...

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