It is rarely that a large group of analysts to be interviewed by an agency would generate a consensus on the outlook for a metal over the next year and a half. To say the least, metal price forecasting is fraught with risk, for analysts get sideswiped by broader macro concerns. However, when recently Reuters polled 19 analysts about copper prospects, each one believed copper demand would stay ahead of supply next year.
Shakeel Ahmed, who as chairman of Hindustan Copper Limited (HCL) is giving a makeover to the company from an indifferently performing integrated base metal complex to a rapidly growing miner of copper ore, says, “As you will see ropy macro data emerging from the West and sovereign risks refusing to die away in some places, the red metal, cannot, but move sideways. But copper’s fundamentals look pretty solid.”
Copper inventories with London Metal Exchange (LME) and stockpiles monitored by Shanghai Futures Exchange, seen as bellwether for metal prices, are falling underlining strong physical demand. LME stocks are down from six and a half year high of 555,075 tonnes in mid-February to about 394,500 tonnes. Shanghai stockpiles are falling since the week ended July 29. To add to the firmness lent by physical demand, hedge funds are buying into copper. As long as interest cost remains low – neither the US nor the UK will go for interest rate hike in view of the economic fragility – and warehouse charges stay at the present low level, funds will continue to own copper and other metals.
Not surprising, therefore, the prevailing environment is encouraging enough for Ahmed as it is for other experts to say: “Give a year, copper will trade at over $9,000 a tonne and then further at $10,000 a tonne in three years or less.” Ahmed refers to a forecast by Australian consultancy CRU Group in support of the $10,000 a tonne price in three years. At this point, from leading copper miner Freeport McMoran to consultancy Brook Hunt every entity speaks bullishly about copper where the mining sector has missed annually production expectation by an average six per cent over the past five years.
Ahmed informs that by way of opening of new mines and also through reopening of closed mines in Jharkhand’s Singhbhum copper belt – call it undoing of past sins – HCL, which mined over 3.2 million tonnes of ore in 2009-10 will be lifting mining capacity to 12.4 million tonnes in the next five years. The long-gestation, capital intensive expansion being piloted by Ahmed will prove “highly rewarding” for the government owned company in the expected high copper price regime.
Many years of low copper prices in the past discouraged global copper majors to prospect for and open new mines. At the same time, as the miners were busy removing the high quality ore from their deposits, the world standard of ore measured in terms of copper content in the mineral is going down. From what Ahmed says, this has a positive bearing for the Indian copper mining sector. “We were apologetic in the past for the quality of our ore. Nothing could be done about what nature has left for us. But now because of years of intensive mining in the rest of the world, the average copper content in ore globally is 0.8 per cent whereas our ore has 1.05 per cent metal in it. This will give good returns on our capacity enhancing investments,” says Ahmed.
India’s copper consumption or mines production is not big enough to move LME prices either way. Thanks mainly to Hindalco and Sterlite and marginally to HCL and Jhagadia, India has nearly a 1 million tonnes smelting capacity on paper. But while on operational viability consideration, HCL decommissioned its bigger of the two smelters in December 2008 and Jhagadia, virtually a non-starter is making use of a fraction of its 50,000 tonnes capacity. India’s copper consumption this year is forecast to grow 13 per cent to 636,000 tonnes from 563,000 tonnes in 2009. That leaves India as a net exporter of copper.
Look at it this way. Assuming that HCL will be producing ore to its present mining capacity of 3.4 million tonnes in pre-expansion times, metal yield will be less than 35,000 tonnes. As a result, Hindalco and Sterlite will continue to remain fully dependent on imports of concentrate for running their smelters. Even post full HCL expansion, the metal generation from mined ore will be around 124,000 tonnes. The prevailing tightness in the world concentrate market leaving very small treatment and refining margins for smelters is a cause of concern for the likes of Hindalco and Sterlite who must give more and more emphasis on operational efficiencies and optimisation of input energy cost.
But this is good news for Ahmed who, as years go by, will have growing surplus of concentrate to sell in the market. In fact, HCL will be better placed if it could do without its Ghatsila smelter which may also have outlived its useful life. But being a PSU, it has to consider the social cost of job losses in an underdeveloped area.
After what proved to be the Niyamgiri hills fiasco for Vedanta, the obvious question remains, will not HCL be facing identical environment issues as it tries to open new mines? “In our case, we will be engaged in underground mining which does not upset the environment. Nor does it cause harm to flora and fauna. Our new underground mine at Malanjkhand in MP with capacity of 5 million tonnes a year will be the country’s biggest in base metals space,” says Ahmed.
While HCL’s lease rights extend over 280 million tonnes out of the country’s copper ore reserves of 370 million tonnes, it remains aggressively in search of new deposits. “We have a robust business model since there will be eternal demand for whatever we extract from the earth,” says Ahmed. HCL is the country’s only copper miner. This has its advantages. But monopoly has also its pitfalls.
