China Deal Shows Optimism Over Copper PricesBy CYNTHIA KOONS and...

China Deal Shows Optimism Over Copper Prices


By CYNTHIA KOONS and SIMON HALL
It might not look like the time to be buying into copper: The price of the commodity has fallen 9.6% since the start of the year, in part because of concerns about China’s slowing economic growth.

So why is a consortium led by a unit of China Minmetals Corp., a state-controlled miner, paying at least $5.8 billion for Glencore XstrataGLNCY -0.38% PLC’s Las Bambas mine in Peru, one of China’s biggest mining acquisitions in years?

For one, China is taking a longer-term view. The nation consumes around 40% of world copper supply, a commodity used to make computers, refrigerators, cars, plumbing equipment and power lines, to name just a few applications.


Copper cathodes in a warehouse near Shanghai in 2012. In March, China’s copper imports rose 31.4% on year to 420,000 metric tons. Reuters
China’s economic growth may be slowing – to 7.7% last year – but it will still need large amounts of copper to fuel urbanization, for its auto industry and to make air conditioners. A major state drive to improve electricity-transmission infrastructure adds to demand.

To some extent, the purchase is strategic, and gives Beijing greater control over the world’s copper market. Glencore expects Las Bambas–due to start operating next year–to produce 450,000 metric tons of copper a year for the first five years and then 300,000 tons annually during its remaining operating life, versus 18 million tons of global copper-mine production in 2013. That will give the Minmetals-led consortium control over a major producer.

There are risks in the purchase. Some of the drop in copper prices this year has been spurred by concerns that slowing Chinese growth could lead to copper oversupply amid big stockpiles.

There also are concerns over copper’s role in China as collateral for bank loans and other financing. IG market strategist Evan Lucas believes as much as 60% to 80% of China’s copper imports have been used as collateral against bank loans. Rising defaults in China, where bad debts are starting to emerge after a multiyear lending binge, could lead to dumping of copper in the market.

Still, copper optimists believe concerns are exaggerated. Morgan Stanley, in a report, said concerns are overdone that unwinding of financing deals could depress copper prices.

Others point to the possibility of constrained new copper supply as a number of upcoming projects face delays. These include delays in plans by Rio Tinto for a major expansion to its Oyu Tolgoi copper mine in Mongolia.

World refined copper production – mine supply and recycled scrap — is expected to increase by 6.5% to 22.4 million tons in 2014 from last year’s levels, but output growth will likely slow to around 4.3% in 2015, according to the International Copper Study Group, an intergovernmental and industry body.

New supply is also more expensive to mine today than a few years ago because of higher labor and energy costs, underpinning prices, analysts say.

Morgan Stanley expects copper prices to rise to $7,397 per ton in 2015, when Las Bambas is due to start producing, from $7,127 per ton this year. That is still below a peak of $8,838 in 2011. But copper prices are expected to continue to trend up in years ahead.

That contrasts with the price of iron ore, for instance, which is widely expected to fall in the future because of a combination of heavy new supply from mines in Australia and elsewhere and slowing growth in Chinese demand.

There are some signs that Chinese demand for copper imports could moderate in the months ahead amid an unclear economic outlook and large stockpiles. Inventories of copper at Shanghai Future Exchange warehouses fell for three straight weeks through April 4, suggesting slowing import volumes are leading to a drawdown of stocks.

Until now, though, imports have remained strong and many observers expect any declines to be temporary. In March, copper imports rose 31.4% on year to 420,000 tons, bucking a trend of broadly lower imports into China as growth slows.

Another factor working for the deal: Las Bambas is an attractive asset in the copper world. It is among the world’s lowest-cost and higher-quality mines, and could be producing for more than 20 years, meaning it should generate strong margins for its owners even if copper prices remain subdued, a person familiar with the asset said.

The deposit also contains “significant” gold and silver, according to Bernstein Research. The firm called Las Bambas “arguably one of the highest quality copper projects currently in development anywhere in the world.”

That is why Minmetals wasn’t the only prospective buyer from China. Jiangxi Copper Co, China’s largest copper producer, and Chinalco Mining Corp. International, the copper unit of Aluminum Corp. of China Ltd., also bid, according to people familiar with the situation.