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Analysis

COPPER :

Growing Consumption Pattern & Volatile Price Play

Demand for copper in India is expected to grow in double digit compared with about 5% globally.

- Vaishnavi Naik

opper being one of the most widely accepted and used metal in almost all spheres of life, its importance is getting improved day by day. Internationally it is gaining momentum at a very fast pace and in the recent past has attracted high price. The Indian growth story has resulted in higher rate of growth in consumption of many commodities. And copper is not an exception with power sector driving the demand high. India, Russia, China are some of the leading consumers of copper now with tremendous growth in construction and power. However, China is the single largest consumer with about 25% of the total global demand of 80.5 million tonne. GDP growth in India during 2006-07 has been more than 9%, which, particularly in the manufacturing sector, will further boost the demand for copper in 2007-08. Agriculture consumes about 30% of the total power in India and free and subsidised electricity is not encouraging them to invest in energy efficient equipment made with appropriate use of good quality of copper. Demand for copper in India is expected to continue to grow in double digit compared with about 5% globally. World refined copper usage is estimated to have increased by 7.2% in the first 10 months of 2007 compared with usage in the same period in 2006. World usage growth was driven by China,

where apparent usage grew by 37% as net imports of refined copper rose by 170% to about 1.18 Mt (million tonnes). World usage outside of China decreased by around 0.7%: increases in Asia (excluding China) and Africa of 3% and 9%, respectively, were offset by decreases in all the other regions (Americas , 3%; Europe, 2.6%; and Oceania, 7.7%).World mine production increased by 4.2% in the first 10 months of 2007 compared with that in the same period of 2006, when production was reduced by technical problems and strikes: concentrate production was up by 2.9% and SX-EW production was up by 9.7%. Year-onyear mine production for the first 10 months of 2007 was up by 6.5% in Asia, 6.6% in Latin America, 0.3% in North America, and 15% in Africa, but decreased by 3% in Europe and 5.5% in Oceania. The average global mine capacity utilization rate for the first 10 months of about 87% is slightly above that in the same period of 2006 (86.6%). Total world refined production increased by 5% in the first 10 months of 2007 compared with refined production in the same period in 2006: primary production was up by 4.6% (with the biggest share of the growth attributed to SX-EW production) and secondary production (from scrap) was up by 7.5%. Refined production grew in almost all regions - Africa (18%), Americas (2%), Asia (9.5%) remaining flat in Europe and Oceania. Refined capacity

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accounted for 52%, followed by the consumer goods and handicrafts segment (20%), the transportation segment (8%), the general engineering segment (5%) and other products (8%), In addition to direct applications, copper is also used in a number of alloys, including brass (copper and zinc), bronze (copper and tin), nickel silver, phosphor bronze and aluminum bronze .Asia and Western Europe cumulatively account for nearly 72% of the global refined copper consumption. With a compounded annual growth rate of 7.6% between 20012006, Asia is currently the fastest growing copper market in the world and is expected to report stronger growth on account of a growing consumption of electric wires and cables. Refined copper consumption in India is expected to grow in line with GDP growth.
World Copper Production & Consumption, 1960-2006

utilization was little changed at around 83%. (Source:ICSG) Last year, the demand in Indian market grew by 15% and the same is likely to continue in days to come with power sector booming. World copper prices, though volatile, are likely to remain at high levels, and in any case significantly higher than breakeven levels, thereby ensuring sustained profitability.From 2000 to 2005, consumption in the Indian primary copper market increased at a compound annual growth rate of 7.9%, which was lower than the growth rates in prior periods as a result of a sharp decline in demand for jelly filled telecom cables, the largest use of copper in India. Decreased demand for jelly filled telecom cables was driven by increased penetration by the cellular telecommunications industry as well as a decrease in optic fiber prices. This led to reduced demand from government-owned purchasers, impacting copper consumption growth adversely. However, supported by strong growth in other user segments such as winding wires, power cables and other applications, industry demand is expected to rebound. The total domestic demand for primary copper is increased 9.8%. from 2004 to 2006. In the global copper consumer market in 2006-07 , the construction segment accounted for 35% of copper consumption, followed by the electronic products segment (32%), the industrial machinery segment (12%), the transportation equipment segment (11%) and the consumer products segment (10%). In India, refined copper consumption increased at a CAGR of 8.9% between 2001 and 2006. It was supported by a strong growth in user segments such as winding wires, power cables and other applications in construction, infrastructure and alloy segments, offset by a decline in the demand for copper used in jelly-filled telecom cables. In the Indian copper market in 2006-07 , the building and construction segment accounted for only 7% of copper consumption, while the electrical and telecommunications products segment

Pricing:
Aluminium and copper, the two non-ferrous base metals and their downstream products, have wide-ranging applications in capital goods and construction activities. Strong and yet lightweight, aluminium and downstream products are used in buildings, construction, transport, packaging, electrical machinery and consumer durables. Copper and copper alloy products, which are known for superior heat and electrical conductivity, are used in heat exchangers, electrical appliances, induction motors, automobile parts etc. Both these are traded actively on the London Metal Exchange (LME) and domestic prices have generally shadowed LME prices. Domestically, aluminium and copper metal and alloys have enjoyed buoyant demand in 2005-06 and 2006-07 due to hectic projects investment, including massive power generation and distribution capacity addition programmes. The wholesale price index (WPI) of copper bars & rods doubled over 2005-06 and 2006-07. Likewise, the WPI of aluminium bars & rods shot up nearly 50 per cent over this period. Among the other products, only aluminium foils seem to have failed to enjoy improving price levels. Accelerating investment in

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infrastructure, housing and electricity should ensure strong demand for aluminium and copper products in future. Although prices are determined by LME price movements, producers normally charge a regional premium that is market driven. The significant price increase in 2006 resulted from healthy demand growth and significant mine supply disruptions of around 800,000 tons, due to limited ore availability and industrial actions at several mines. The following table sets forth the movement in copper prices from 1997-98 to 2006-07 : ($ per ton, except percentages) The Following Table Sets Forth The Movement In Copper Prices From 1997-98 To 2006-07 : ($ Per Ton, Except Percentages) perform aluminium in 2008 as global credit woes limit demand due to slowdown in the US economy, driven by the housing recession and high oil prices, could weigh on copper's performance, even though economies in developing countries, such as China, are likely to remain strong. In 2007, copper futures on the London Metals Exchange rose 5.5 percent to $6,675 a tonne, while aluminium fell 14 percent to $2,409 a tonne. Copper has since recovered to $7,155 a tonne and aluminium has firmed to $2,452 a tonne. In 2006, global copper prices averaged around US$6,700 a tonne, 83% higher than the average price of around US$3,700 a tonne in 2005. Global copper production was constrained by labour disputes, natural disasters and production disruptions, with the result that global copper stocks remained low, particularly in the first half of 2006. However, after reaching a high in May 2006 of around US$8,800 a tonne, prices declined substantially in the latter part of 2006. Stocks of copper held by metal exchanges (London Metal Exchange, COMEX and the Shanghai Metal Exchange) increased by around 78,000 tonnes in the second half of 2006 and again in early 2007, reaching over 260,000 tonnes in midJanuary, the highest since 2004. This extended the price decline from December 2006 levels by around 10% in January 2007.

For custom smelters, TcRc rates have a significant impact on profitability as prices for copper concentrate are equal to the LME price net of TcRc and prices of copper finished products are equal to the LME price plus a premium. A significant proportion of concentrates are sold under frame contracts and TcRc is negotiated annually. The TcRc rates are influenced by the demand-supply situation in the concentrate market, prevailing and forecasted LME prices and mining and freight costs. The average LME cash price for December 2007 decreased to US$6,587.67 per tonne from the November 2007 average of US$6,966.70 per tonne. On October 3, the price spiked to its highest level of 2007 at US$8,301.00. The price was at its low point for 2007 of US$5,225.50 in February 8, and averaged US$7,126.35 per tonne for the full year. As of the end December 2007, copper stocks held at the major metal exchanges (LME, COMEX, SHFE) totalled 238,338 t, a decrease of 14,452 t from stocks held at the end of December 2006. As compared with stock levels at the end of November, stocks held at the end of December 2007 were up at the LME but down at COMEX and SHFE. Copper prices could weaken in 2008 compared with 2007, and the average prices on the London Metal Exchange could fall further in 2009 as supply grows, Copper is expected to under

Strong Asian demand continues to dominate the copper market. On January 21, 2008, the International Copper Study Group (ICSG) said that its preliminary data showed that world copper production fell short of consumption by 220,000 tons in the first ten months of 2007. World mine production was up 4% from a year ago while total usage was up 7%. The big increase in usage is coming primarily from China. On October 1, 2007, the ICSG reduced its estimate of a 2007 world production surplus from 282,000 tons to 110,000 tons. For 2008, its estimate of a production surplus was reduced from 527,000 tons to 249,000 tons. For all of 2006, the ICSG said that world copper production exceeded consumption by 255,000 tons in all of 2006, a fairly dramatic increase from the 123,000 ton production deficit in 2005.The bearish threat to this market

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usually comes from Chile where the bulk of the world's copper is produced and expansion plans continue. However, in 2006, South American production was up just 1% and the biggest increase (17%) came from Africa. London inventories of copper started 2007 at 182,800 tons and ended the year at 197,450 tons. (Source: daily futures)

Future Outlook:
\In India, 57 per cent of the copper is used in wiring for power and telecom sectors. Shoring up consumption levels in areas like automobiles, railway engines and construction, would also hold the key to the successful exploitation of increasing capacity. By 2010, India's copper capacity is expected to touch 9 lakh tpa, due to both Brownfield and Greenfield expansions. Hindalco Industries is doubling the capacity of its Dahej smelter in Gujarat to 5 lakh tpa. Sterlite is expanding its Tuticorin smelter in Tamil Nadu from the present 1.8 lakh tpa to 3 lakh tpa. In the coming months, SWIL's much-delayed 70,000-tpa Jhagadia smelter in Gujarat is expected to be fully operational. By 2020, copper capacity in India is projected to rise to 16-18 lakh tpa, going by the growth in domestic demand. From 4 lakh tonnes in 2003, copper demand is estimated to grow at 8 per cent annually, much higher than world demand growth of 3 per cent. India has to rely on imported copper concentrates to feed its smelters. Therefore, international prices would hold the key not only to future expansion projects but also sustenance of existing capacity. In the coming years, a major shift would be noticed in the sourcing pattern, from conventional imports to acquisition of mining rights abroad. Already, the Hindalco group has acquired mining rights in two copper mines in Australia. This trend would need to persist if domestic capacity utilisation were to be ensured. Demand drivers for copper in India would be power, railways, telecommunication and exports. India's power capacity is targeted to double to 2 lakh mw by 2012. This, in conjunction with the programme of electrifying 80,000 Indian villages by 2012, would be the biggest demand avenue. Exports would be a thrust area for Indian copper, particularly

from China where copper consumption is growing phenomenally. In 2003, China consumed 3 million tonnes of copper, and demand growth of 15 per cent is likely to persist till 2010. China is expected to account for 19 per cent of world's copper consumption, as against 10 per cent in 2003. Current shortages in worldwide copper supplies are expected to continue following production cuts by leading producers in Mexico and Chile. This would further shore up demand for Indian copper. Aluminium demand is supported by booming real estate and automotive development in China, the world's fastest growing major economy. Substitution away from pricey copper could also lift aluminium as China's aluminium usage has surged. Usage in construction, transportation, and electronics has all expanded sharply.Aluminium is taking market share from other metals, such as copper, as the prices of those metals remain very high. China's apparent consumption of primary aluminium rose by over 40 percent in the first 11 months of 2007, beating the growth rate of 31 percent in refined copper. Demand growth in aluminium has been growing faster than copper and it could be the fastest growing among the metals.

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