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20 Million—Why Is this Number Critical for Copper?
By theaureport.com
For resource expert Joachim Berlenbach, fund adviser with Switzerland’s Earth Resource Investment Group, copper is shining brighter than gold—he even does some back-of-the-envelope calculations to show how global development could create a serious supply bottleneck. In his first Metals Report interview, Berlenbach calls on investors to up their risk appetites and fund mine development, providing some straightforward metrics to weigh the odds.
The Metals Report: Joachim, is the smart money finding its way into mining equities?
Joachim Berlenbach: At the moment, no. When we talk with investors, we hear a lot about risk relative to commodities and commodity equities. But I hope investment grows because the commodity cycle is far from over. There are two important benchmark numbers to consider. In 2012, for the first time, the world used more than 20 million tons (20 Mt) copper. Second, the world now needs more than 90 million barrels (90 MMbbl) oil each year. Every investor needs to remember these two numbers: 20 Mt and 90 MMbbl.
TMR: Are you more bullish on copper than gold at this point?
JB: I am fascinated by where the copper market is going. It’s more interesting than gold right now. Also, if the copper market is tight, then we will really have problems as countries like China or India continue to develop. Copper is necessary to building a modern society. It goes into all kinds of infrastructure and is needed in cars, electrical appliances and houses. And there are very few substitutes for it.
We are at a critical point, because it takes at least 10 years to develop a big copper mine from the first bore hole to production. Anglo American Plc (AAUK:NASDAQ), BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) and some smaller companies are curtailing their expenditures and cutting their exposure on building new mines. We will not be able to build that if investors remain so risk averse.
As for gold, I think that it ultimately must be monetized. I believe that gold is the best currency we have, but we need to see more proof that gold really is money. Too much of the focus on the gold sector is on U.S. interest rates and not enough on remonetization. We need to be more aware of deals like Iran selling its oil to Turkey or China for gold. Do you believe China has 1,054 tons gold in reserve? I do not. China is both the biggest producer and importer of gold. News from China on the gold side could be very bullish for gold and could be an indication that gold is becoming more monetized.
TMR: Do you see global consumption of copper exceeding 20 Mt in 2013 or staying static?
JB: I think it will increase. There is a very good correlation between a country’s gross domestic product (GDP) growth and its copper demand. China’s per-capita GDP is around $8,000, and it uses around 6–7 kilograms (6–7kg) copper per capita, up from 4 kg in 2009. That may not sound like much until you multiply that 2 kg difference by 1.3 billion (1.3B) people.
Assuming China’s GDP grows by 7% per year, by 2021 its per-capita GDP will be around $15,000, about the point that marks the establishment of a healthy middle class. You can also calculate that China will need around 13 Mt copper in just eight years. That increase in demand equates to roughly 1 Mt per year. To meet that need, we must explore and build mines. And the mines will have to be bigger, because copper grades are coming down rapidly. Falling grades is one of the biggest sources of cost inflation in the copper industry.
Another fascinating element is development in the alternative energy sector. Some of the biggest wind parks in the world are being built in China, and both Germany and the U.S. are building their wind power capacity. To build a wind turbine that produces 1 megawatt of energy, you need approximately 4–9 tons of copper for use in both the turbine and the cabling that connects a turbine to a transformer.
I have been consulting with Siemens AG (SI:NYSE), the German electronics supplier. It is concerned about the copper supply, as well as supplies of certain rare earth elements (REEs) needed for magnets in wind turbines. Added together, current copper demand for wind turbines and alternative energies amounts to only a few hundred thousand tons per year, and the new projects coming on-line may cover that demand. But if the world really goes for all types of alternative energy, the current drive toward 25–27 Mt of copper demand in 2021 could accelerate to 30–35 Mt. We need a certain copper price to build the mines needed to meet this demand. If the copper price should go down to $1.30 per pound ($1.30/lb), as it did in 2008, there is no way that we can build these mines.
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