Copper

Markets

During the early part of 2008, Chinese demand strength and ongoing supply disruptions contributed to strong but volatile copper prices. From the second half of the year onwards, prices were impacted by challenging financial and credit environments and weaker global macroeconomic conditions. The LME copper price declined rapidly from a mid-year high of $4.08 per pound to $1.32 per pound at year-end. The average price for 2008 was $3.15 per pound, 2.5% or 8¢ per pound lower than in 2007.

The financial crisis and resultant negative sentiment on the outlook for global economic prospects saw copper end-use demand stall in the OECD economies during the fourth quarter. Major copper-consuming sectors, including construction and transportation, were particularly badly affected and refined demand fell sharply. Demand from China also slowed during the second half, largely due to the government’s credit-tightening measures aimed at cooling inflation, as well as a slowing housing sector and weaker export markets.

The tight physical market that persisted during the first half of 2008 unwound over the final months of the year, resulting in increased deliveries of cathode to exchange warehouses. Global copper exchange inventories ended 2008 at 390,000 tonnes, an increase of 152,000 tonnes or 64% on the closing level in 2007.

On the supply side, the rapid decline in LME copper prices along with liquidity constraints have caused the closure of several marginal mines, as well as production cutbacks, project delays and the cancellation or deferral of exploration expenditure.

However, supply losses have not yet been sufficient to offset the decline in demand and concentrate market tightness has eased amid lower demand from custom smelters. Following mid-year contract settlements at $42 per dry metric tonne and 4.2¢ per pound, spot terms had risen to $75 per dry metric tonne and 7.5¢ per pound by the end of the year, and the 2009 annual benchmark has also been set at this level.

Outlook

Macroeconomic conditions are expected to remain weak during 2009, limiting copper demand growth. Government efforts in a number of major copper consuming economies to stimulate economic growth using fiscal measures are expected to provide some level of support to end-use demand, particularly in China. Further supply cuts are also likely in the event that prices remain depressed for a prolonged period.

To date, industry participants have announced the curtailment or suspension of over 600,000 tonnes of unprofitable production. Global mine supply is expected to be further constrained by operational underperformance such as pit wall problems, lower grades and mill availability and it is estimated this will reduce global copper supply by 1.0 million tonnes in 2009 (1.4 million tonnes in 2008). The combination of both curtailment of unprofitable production and operational underperformance represents a production cutback of approximately 9% of planned 2009 production levels prior to the economic downturn in the second half of 2008. Perhaps even more noteworthy is the likely impact on longer-term supply growth, as announced cancellations or deferral of growth projects have removed over 2.8 million tonnes of new copper supply over the next four years, introducing significant future constraints. These actions are likely to assist a rapid tightening of the physical market when demand increases as a result of fiscal stimulus packages and improving global economic conditions.

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