https://www.miningweekly.com

Copper a good bet in the long term – consultancy

17th April 2015

By: Dylan Stewart

Creamer Media Reporter

  

Font size: - +

Although the copper price has weakened considerably since its cyclical peak in January 2011, many important stakeholders, such as midtier and major mining houses, are still investing in copper, says professional services firm EY mining and metals sector leader for Africa Wickus Botha.

He tells Mining Weekly that, owing to copper being used in electrical wires and piping – as there is no real substitute for the metal – amid trends of urbanisation and industrialisation, companies regard the downturn in copper demand as only temporary and are, therefore, preparing for another boom in demand.
For example, Australian mining major BHP Billiton has continued to invest in copper assets while shedding others, despite the copper downswing, taking full advantage of China’s high demand for copper and the country’s close proximity to Australia.

Although only a few formal statements have been made to date, Botha suggests that it is being strongly touted that many investors, including private-equity funds, are quite interested in copper.

He also points out that many copper mines are reaching the end of their life and, therefore, demand for new mines will increase, which will facilitate new investment and growth in the copper industry.

Botha further notes that new uses for copper are emerging, for example, in the medical field to provide bacteria-free countertops as opposed to stainless steel countertops that accumulate bacteria.

Lower Prices
Botha says the strength of base metals, particularly copper, is a litmus test to indicate the strength and direction of the global economy, owing to the base metal’s strong link to industrial and urban development.

From January 2011 to January 2015, the copper price dropped by more than 40%, from $4.50/lb to $2.50/lb, having decreased rapidly in the final two months of that period. Other base metal prices have similarly decreased. Since January 2015, the copper price has risen to $2.62/lb.

Botha states, however, that the base metals litmus test is not to be taken as an absolute and he believes that the weakening of base metals demand in the market could be attributed to three main reasons, two of which do not indicate a lagging economy.

Firstly, and most importantly, he says the entire commodities market had a hangover effect from the commodity boom from late 2010 into 2011 and, rather than being attributable to market fundamentals, the drop in price was largely because of speculative negativity sparked by the price decline in iron-ore.

Secondly, he believes that there was a moderate oversupply of base metals, but that this was a cyclical overshot rather than a tactical oversupply to drive competitors out of the market.

Botha suggests that tactical oversupply is unlikely in the base metals industry because there are no junior companies that can easily be driven out of the market; the loss of margins from the complex processing of base metals is also greater than that of a commodity like coal or iron-ore, generating a much less top-heavy cost curve.

Thirdly, Botha attributes the commodity price drop to a slowing global gross domestic product growth rate, which has resulted in a slightly reduced demand for base metals. He emphasises, however, that this is temporary, reiterating that there is a fundamental demand for base metals in most spheres of the economy.

Cutting Costs
With the lower price of base metals, in general, companies are aiming to reduce unit costs, Botha notes.

During the commodities boom, companies reduced unit costs simply by increasing production and achieving economies of scale.

To reduce costs at the lower base metal prices, companies are focusing on optimising their portfolios and on mining higher-grade areas so that greater value is mined per unit of effort.

Botha adds that there is talk of lowering production for base metals, including copper, but this measure, which is yet to be implemented, would be only for the short term.

South African Context
Botha does not believe that the South African market will be significantly affected by these trends in the base metals industry, particularly because there are very few primary producers of base metals in the country.

Owing to this, South Africa is not a significant net exporter of base metals, with copper producer Palabora Mining Company, owned by a consortium led by national development finance institution the Industrial Development Corporation and Chinese steel producer Hebei Iron and Steel Group, the only primary copper producer in South Africa.

South African diversified mining and minerals company African Rainbow Minerals’ Nkomati nickel mine, in Mpumalanga, is the only primary producer of nickel in the country.

However, the metallurgical processing of nickel is complex and Botha states that the South African electricity supply is too unstable to support a nickel smelter.

In addition to Palabora and Nkomati, diversified natural resources company Vedanta Resources has bought a few zinc and lead mines near the border between South Africa and Botswana.

Other than that, all other base metals production in South Africa is mainly as byproducts of gold and platinum production and those mines will not be particularly affected by shifts in the base metals industry.

Botha suggests that to increase interest in the base metals industry in South Africa, electricity supply needs to become a lot more stable. He explains that BHP Billiton’s and Rio Tinto’s existing smelters were initially built because of cheap, reliable electricity.

“Today, a very big percentage of South Africa’s smelting capacity is idle because operating them is too risky, owing to unstable electricity supply.”

In addition to securing reliable electricity supply, Botha believes that to take advantage of the next uptick in the commodities cycle, South Africa needs to secure its enabling factors by putting in place a transparent, stable developmental framework in terms of mining laws and regulations.

Edited by Leandi Kolver
Creamer Media Deputy Editor

Comments

The content you are trying to access is only available to subscribers.

If you are already a subscriber, you can Login Here.

If you are not a subscriber, you can subscribe now, by selecting one of the below options.

For more information or assistance, please contact us at subscriptions@creamermedia.co.za.

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION