Why Copper?
Classic Supply/Demand Squeeze: Copper Prices Increasing Due to High Consumption and Low Inventories
Copper prices are maintaining very robust levels. Copper prices have increased from US$0.63/lb Cu when Equinox acquired Lumwana, and averaged US$3.35/lb Cu in October-2006 when the updated Lumwana Copper Project Technical Report was completed and published, and averaged US$3.24/lb in 2007.
Copper markets are cyclical, typically with periods of high copper prices that last for 4 to 7 years, followed by similar periods of low copper prices. The upswing in the current copper cycle commenced in late-2003 and continues strongly. The present cyclical uptrend can be attributed in large measure to the rapid industrial growth in Asia, particularly China. There is typically an inverse relationship between copper prices and copper stockpiles or inventories for sale in the metal warehouses such as the LME and Comex. These inventories continue to be at marginal levels whilst global consumption shows no major signs of softening.
Copper Consumption Related to Global Growth
Consumption of copper is related to world growth and copper demand continues to be robust, largely driven by spectacular growth in China and buoyant growth in India, Russia and Brazil which substantially dominates over flat demand in the US and Europe. The underlying Chinese consumption trend remains strongly positive with domestic metal availability still very tight, driven by the key factors of industrialization, urbanization and consumerism. Such demand growth is still at an early stage in other major developing economies like India.
Limited Expansion of Production Due to Reduced Exploration
There are a limited number of major new copper projects coming on stream in the next few years. The globally dominant copper producing regions such as the south western US and Chile have reached a maturity where output growth is declining due to reducing head grades, deeper mines and less favourable metallurgy. The supply of new production has been severely constrained by the lack of exploration expenditure during the 1990s. It needs to be recognized that the lead time from discovery to development for a major project is typically 8-10 years. While exploration spending has increased quite sharply over the last 2 years, it may take a substantial amount of time for this to impact on new mine developments. Lumwana is the largest new copper mine coming into production in the world over the next 3 years.
Future of the Copper Market
Some copper market analysts believe that we are experiencing a "super cycle" that represents a structural shift in the copper market. Most agree that there are at least several years of strong copper prices ahead and apply long-term copper price projections ranging between US$1.25 - $2.25/lb Cu (average of US$1.56/lb - March 2008) with a consensus view that average annual prices in 2008 when Lumwana commences production will be about US$3.20/lb Cu.
Lumwana represents one of only a handful of new copper projects of world scale that are near to starting production.
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