London, 7 April 2011: Reuters

The CRU Copper Conference took place this week in the wake of new historical copper price highs, but amid continuing concerns, also raised in 2010, about the inability of the industry to overcome the challenge of a structurally tight supply.

The main take-away from the conference is that copper capex and opex are not going to fall and as a result, copper is unlikely to be cheap any time soon. Copper in particular (and commodities in general) having seen strong demand growth for almost a decade from China will see continuing robust demand, albeit with notable risk from substitution.

For some commodities, such as aluminium, prices have not changed significantly because additional supply can be brought on-stream relatively quickly (the only constraint, really, is cheap and hopefully clean electricity to produce more aluminium). Copper is different - it takes much longer (a good 10-12 years from when a sizeable resource has been defined) to develop mine projects which are either increasingly low grade or remotely located, lacking sufficient infrastructure.

The demand story for copper is convincing (with caveats), but it is the supply side constraints which have kept, and most likely will continue to keep, copper prices high. Supply-side constraints in the copper industry are indeed so deep-rooted that any short-term or long-term solutions to copper supply are quite remote.

In the past few days we have heard from exploration drilling companies having to turn away business, major EPCM companies failing to hire enough labourers and engineers to carry out projects, too few equipment makers, a lack of experts to evaluate projects and too few institutions to gather the information necessary to move the industry forward.

The shortage of skilled human resources throughout the industry and its auxiliaries was a major theme of many presentations; there is no shortage of concerned parties. These are serious problems for an industry which needs to bring on as many projects as possible in as short a period as feasible in order to avoid major substitution away from copper. While US$10,000/t is a psychological barrier which might be passed, prices close to and above this level will necessarily lead to substitution. Approximately half of the demand for copper is (at least in the medium-term) invulnerable to substitution – the majority of this constituted by building wire, power generation infrastructure, electrical connectors and so forth.

Approximately 15% is highly vulnerable, including plumbing tube, roofing strip and communication wire, segments which have been in continuous substitution over the past 20 years. What we have to worry about is the 35% of remaining demand, a segment which could see structural demand shifts over the next few years should high copper prices be sustained.

Take wire harnessing in cars as an example. It might take a long time for car manufacturers to choose aluminium over copper, but if it happens we are looking at a significant, and largely permanent, reduction in copper demand. The same holds true for other applications (air conditioning units have already seen a strong shift towards aluminium and copper plumbing is being continuously displaced by PVC).

In many of these cases the substitution is potentially irreversible. Complacency in the face of substitution and in the development of new mining assets will hurt the copper industry in the long-term. High prices will most likely hurt copper demand in the medium- and long-term. However, the supply challenge is not easily overcome.

Increased copper supply necessarily begins with exploration. This is a prerogative for a healthy copper industry. Even if we have a deposit worthy of development, a typical copper mine will take another 10 to 12 years to come to production. This is not the time to rest on laurels of US$10,000/t copper. The conference is over, it is time for everyone to get back to digging.

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