chinese develop appetite for copper and zinc

Chinese develop appetite for copper and zinc

Thursday, September 27, 2012

OUT AND ABOUT: China’s appetite for iron ore may have waned recently, however the new items on the Dragon’s menu look like being bauxite, copper, and zinc.

Everyone knows China has a huge appetite for commodities, that part of any resources-related story is not new.

However, its tastes appear to be changing and the magnitude of the resulting demand and the corresponding need to import material is going to determine what mines, outside of China, are developed.

“That’s what I mean by ‘Right Sizing’ for the market,” CRU Strategies senior consultant Katherine Wright told the RIU Melbourne Resources RoundUp this week.



“The concept obviously matters if you are an investor because if you want to know what projects are economically viable, particularly in this tough economic climate.

“And, obviously it matters if you are a miner because you want to know if the market can support your project.”

BAUXITE

China has aims to be self-sufficient in aluminium and in order to achieve this has been building more and more smelting and refining capacity.

CRU’s latest consumption forecast, indicates China only has enough bauxite reserves to last seven years.

“Obviously it is not going to go down to zero [reserves] as more resources are turned into reserves,” Wright explained.

“There will be some more bauxite, but I think China is going to need to find bauxite elsewhere in the world.

“The Chinese government has enhanced its exploration programs domestically in recent years, but the country still needs to import large quantities of bauxite.”

China currently imports most of its bauxite form Indonesia, while the world market is essentially fed by the Atlantic and Pacific Basins, much like iron ore used to be.

However, the Indonesian government recently through a spanner amongst the pigeons by announcing its intention to ban bauxite exports from 2014.

This has already had an impact on things with exports from Indonesia restricted in May / June of this year having a knock-on effect that caused some alumina refineries in China to cut back on production.

The next obstacle for the Chinese to negotiate is obviously how quickly the country can source bauxite and from which other countries will it do so.

Possible resources are emerging from Asia; or they could tap the newest kid on the bauxite export block of Fiji.

The demand could also prompt projects in Australia to get up and running more quickly; to ramp up to production more quickly resulting in more export from Australia.

“CRU believes the countries that are most likely to support China’s bauxite needs are those in the Pacific Basin,” Wright said.

“For the time being Indonesia will continue being the main supplier, but Australia will be this swing supplier in the market, which means it is the price-setting producer.”

COPPER

Wright told the conference audience that CRU forecasts more than 90 per cent of the new smelting capacity to be built out to 2017, will occur in China.

The country holds similar self-sufficiency plans for copper as it does for aluminium, which has created a much greater need for imports of concentrates.

“It should be noted in this case that China does actually import significant quantities of scrap and refined copper,” Wright said.

“Looking out further, for a few years, China has a very large concentrate supply gap and it is finding it very hard to close this gap because there is more competition in this market.”

The majority of China’s copper concentrate imports still come from the traditional markets of Chile and Peru in South America.

However, in recent years their share of the total has declined as China’s appetite for copper concentrates has grown, which has seen the number of suppliers and of countries involved in this market increase in kind.

While China has an equity stake in a number of copper projects throughout the world, it seems that stake is in less projects than may have been the case five or six years ago.

Many of the country’s domestic copper mines are small and high cost with costs continually on the rise, which makes it more economic for China to import copper concentrates than to produce them domestically.

“China will continue to get copper concentrates from the South American countries, but countries in North America and Africa will have to supply China with copper concentrates otherwise it won’t be able to feed the smelting appetite of the country,” Wright said.

ZINC

The fundamental global and the Chinese zinc markets have been in deficit for a number of years.

Chinese companies have been investing in zinc projects all along the value chain, however its smelter capacity is still forecast to outpace that of mine production.

Globally we are about to witness around 15 mines scale down production as they move towards closure over the next few years.

This has created an expectation that, within China, a lot of domestic zinc mines will be developed.

“Many zinc smelters in China do want to become integrated and the way to do this is to buy domestic mines,” Wright explained.

“These mines aren’t particularly low cost but the Chinese seem to be okay with that.

“They would rather build these higher cost mines than to deal with the bureaucracy of going outside China to develop projects.

“Outside of China, what we expect to happen is for the larger Chinese companies – those that produce more than 50,000 tonnes per year – to buy out projects that are being developed by junior miners in other countries like Australia, Canada, and in Africa as well.”

The emerging issue for companies with potential zinc mines is that for these projects to be built the zinc price needs to be about 50 per cent higher than what it is now.

“Demand is going to increase going forward over the next couple of years, but the price isn’t going to kick back overnight, which means these projects aren’t going to be financed for a number of years,” Wright said.

“Even though we can see the gap coming and everyone knows it is coming, the projects aren’t going to get financed.

“For those producers, or junior miners, that have zinc products have the cash to hold on for the next couple of years, there is going to be a bonanza, we expect, in the zinc market.

“Demand will go up and prices will, correspondingly, go up as well.”

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