COPPER MARKET TRENDS REPORT - Cochilco · 618.7 kMT peak of February 25, the highest since March 2004. Deliveries to LME warehouses grew especially fast. The average daily delivery

Chilean Copper Commission Research Department

COPPER MARKET TRENDS REPORT

JANUARY-APRIL 2009

COCHILCO Chilean Copper Commission

2 Research Department Chilean Copper Commission

Contents

1. Market Outlook: January-April 2009 ................................................................................................. 3

2. Copper Demand ............................................................................................................................... 7

2.1. World Economic Outlook ............................................................................................................... 7

2.2. Refined Copper Demand ............................................................................................................ 10

3. Copper Supply................................................................................................................................. 13

3.1. World Mine Production................................................................................................................. 13

3.2. Chilean Mine Production ............................................................................................................. 16

3.3. Refined Copper Supply ................................................................................................................ 18

4. Market Balance and Price Outlook ................................................................................................ 19

4.1. Market Balance ............................................................................................................................ 19

4.2. Price Outlook for 2009-2010 ......................................................................................................... 19

5. World Smelting Industry ................................................................................................................... 21

5.1. World Smelter Production ............................................................................................................ 21

5.2. World Concentrate Production ................................................................................................... 22

5.3. Concentrate Market Balance ..................................................................................................... 23

5.4. Treatment and Refining Charges (TC/RC) .................................................................................. 24

6. Other Relevant Metal Markets ........................................................................................................ 25

6.1. Molybdenum and Steel ................................................................................................................ 25

6.2. Gold and Silver ............................................................................................................................. 26



1. Market Outlook: January-April 2009 In January-April 2009 the price of copper in the London Metal Exchange (LME) averaged 166.438 ¢/lb., down 6.9 percent from Q4 2008 and 54.2 percent below the average for January-April 2008.

This lowest of quarterly averages since Q2 2005 was 55.6 percent above the 2008 close. The quarter was noted for fluctuations within an uptrend which consolidated in mid-February (see Chart 1), with April prices closing above 200 ¢/lb. These gains were concurrent with increases in metal exchange inventories through 25 April (see Chart 2). The period under review closed at 469 kMT or 9.9 days’ world consumption.

In Q4 2008 the global meltdown set copper prices back 67.7 percent from July to December, their biggest loss on record. Prices later rebounded to above 200 ¢/lb. as the impact of the crisis on the copper industry leveled off. Mid-April prices surged past the 200 ¢/lb. mark and stayed there through most of the month.

COPPER MARKET TRENDS REPORT January-April 2009

January-April copper prices fell 6.9 percent

over Q4 2008…

50

100

150

200

250

300

350

400

Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

Gráfico 1: Precio del Cobre en la BML(¢US$/lb.)

Fuente: Bolsa de Metales de Londres

100

150

200

250

01-Ene 31-Ene 02-Mar 01-Abr

Enero-Abril 2009

100

200

300

400

500

600

700


Gráfico 2: Inventarios en BolsaMiles de TM

Shanghai BML ComexFuente: Bolsas de MetalesFuente: Bolsas de Metales

200

400

600

01-Ene 31-Ene 02-Mar 01-Abr

Enero-Abril 2009



In early 2009 copper prices benefitted from commodity index weights revisions computed each year, in a process that often prompts the purchase or sale of various commodities as their weight rises or falls. The Dow Jones-AIG, for example, revised copper’s weight from 7.04 percent in 2008 to 7.31 percent in 2008-2009.

The most consistent support for copper prices in January-April came from China, which posted a strong increase in apparent demand following the New Year festivities in January. A key driver were purchases by China’s State Reserve Bureau (SRB), which leveraged prevailing low prices to replenish inventories.

The strength of Chinese demand was evident in substantially larger refined copper imports in Q1 –up 97 percent from a year earlier- supported by favorable price arbitrage (see Chart a). SHFE prices in the period surged past

their LME counterparts due to a relatively tighter local market. In March alone China bought 500 kMT of refined, concentrate and scrap copper, its largest purchases in history.

Rising Chinese demand for refined copper is also a function of major declines in secondary supplies. Availability of scrap copper for smelter or fabrication use has nosedived along with copper prices. The global scrap supply has shrunk as manufacturing plummets and in response to sliding copper prices. Chinese Customs reports a strong decline in scrap imports in January and February, with a slight rebound in March (see Chart b).

Its role in helping copper prices level off, then rebound shows that eventual slumps in Chinese demand would have a significant impact. As long as uncertainty continues over the results of crisis-fighting measures implemented by key industrialized economies, the copper market will remain highly dependent on Chinese demand.

…but closed the period 55.6 percent above the

2008 closing price.

Growth in Chinese apparent demand was a

key price driver…

…and so was a global scrap shortage that led to rising demand for refined

copper.

-60

-50

-40

-30

-20

-10

-

10

20

30


Gráfico (a): Diferencia SHFE-BML¢US$/lb.

Fuente: Elaboración propia.



In industrialized economies, a drastically expansive monetary policy intended to prevent financial system collapse has had to be complemented by strong fiscal expansion in the form of stimulus packages. The U.S. unveiled several such initiatives in the period under review, including an initial $500 billion allocation to buy so-called “toxic assets” and a $787-billion stimulus package. Japan expanded its own fiscal stimulus package by $1 billion, while a March meeting of G-20 nations agreed to pump an extra $1 billion into agencies such as the International Monetary Fund.

The $581 billion fiscal stimulus package unveiled by China in November was initially taken with some caution. Once details were released, however, market reaction was hopeful that it would lead to a recovery in H2 2009. The Chinese plan is designed to encourage recovery in specific infrastructure areas, including intensive semi-manufactured copper product user sectors such as housing construction, power grids, and road improvement.

Most base metals (see Chart c) have had a rougher ride than copper. This is clearly evident by comparing closing prices in December 2008 and April 2009. Copper gained 55.6 percent, followed by lead (42.8%), zinc (25.7%), tin (21.3%), and nickel (6.4%). Aluminum lost 1.7 percent, partly as a result of record inventories of over 3.7 million tons.

While announcements of disruptions in mine production have continued, they seem less significant than those posted late last year. As prices have risen above 190 ¢/lb. mine closure announcements have abated, with companies focusing instead on cost-cutting and capital investments. With new projects and planned expansions on the back burner, output over the next two years is expected to decline relative to previous forecasts.

…although the impact on base metals has been

mixed, depending on fundamentals.

Governments have adopted a range of

measures to deal with the global crisis…

-100%

-50%

0%

50%

100%

150%

200%

250%

300%


Gráfico (b): Variación (%) Acumulada en las Importaciones de cobre de China

Refinados Concentrados ChatarraFuente: Aduana China.

Although production cut announcements have

continued, mine output remains stable.



On January 26 Freeport McMoRan announced significant production cuts at its Morenci facility. All cuts and deferments considered, Freeport production of refined copper in 2009 should drop by 90 kMT. Yet, these cuts and others announced late last year failed to offset weak global demand. Providing evidence of a relatively well-supplied market, exchange inventories rose 20.4 percent between closings. Still, inventories dropped 24.3 percent from their 618.7 kMT peak of February 25, the highest since March 2004.

Deliveries to LME warehouses grew especially fast. The average daily delivery rate in January was 7.2 kMT, tapering off to 2.6 kMT in February. The above inventory peak was followed by strong drawdowns averaging a daily 1.9 kMT in March. As the quarter drew to a close, net LME inventories had risen 47 percent or 159.9 kMT (see Table 1).

With western economies in the doldrums, most LME drawdowns since late February are attributed to China. Supporting this view is a significant concurrent rise in refined copper imports to China (see Chart b).

Of use in tracking the above process are LME cancelled warrants. These grew noticeably in early March, anticipating drawdowns from mostly European (i.e., Dutch and Italian) warehouses. Cancelled warrants remained high in April, closing the month at above 84 kMT or nearly 21 percent of total LME inventories.

Most LME copper inventories were stockpiled in U.S. warehouses, which in late April 2008 held 62.7 percent of LME stocks, fully a 145 percent increase over the previous yearly closing. While European warehouses held 34.1 percent of LME inventories, their holdings in the same timeframe only grew 34.1 percent. These figures reflect the extent of the downturn among major U.S. copper consumers, notably carmakers and construction.

Exchange inventories hit a five-year high in

February.

Most gains took place in U.S.-based LME

warehouses, partly offset by drawdowns from Asian warehouses.

0

20

40

60

80

100

120

140

160

Dic-07 Abr-08 Ago-08 Dic-08 Abr-09

Gráfico (c): Indice de precios de metalesbase Diciembre 2007=100

Aluminio Plomo ZincEstaño Níquel MolibdenoCobre OroFuente: elaboración propia.



South Korean warehouses used by China for arbitrage transactions were alone in posting drawdowns. These resulted in an 81.9 percent region-wide decrease, closing at the remaining 3.3 percent of LME holdings.

While Comex rose 13 kMT or 41.98 percent in the period under review, overall quarterly transactions remained weak despite a strong buildup in U.S.-based LME warehouses.

SHFE inventories remained relatively stable, posting the smallest increase in absolute terms (1 kMT). This shows that Asia is currently alone in retaining a degree of demand through the current crisis.

2. Copper Demand 2.1 World Economic Outlook The April revision of the IMF World Economic Outlook predicts a 1.3 percent global contraction for 2009, down from the 0.5 percent growth forecast made in January.

The new downward revision rests on the following assumptions: (i) The base lending rate will fall or stay close to zero in most industrialized economies; (ii) Fiscal deficits will expand considerably in industrialized and emerging economies as G-20 nations roll out stimulus packages amounting to 2 percent of GDP in 2009 and 1.5 percent of GDP in 2010; and (iii) Commodity prices will remain flat in 2009, then grow only moderately in 2010.

While growth should resume in 2010, it is not expected to exceed 1.9 percent, well below the 3 percent predicted in January. The IMF report also anticipates that recovery won’t be as strong as in past recessions. This is a very particular situation where a financial crisis and a worldwide downturn have combined to produce “an exceptionally lengthy and deep” synchronized recession.

The report establishes a strong link between stimulus packages and a stronger recovery, but notes that their impact on the strength of recovery is

Table 1: Metal Exchange Inventories Q4 2008 April 2009 Q4 2008 – April 2009 April 2008-2009

kMT kMT Percent kMT Percent

LME 340 406 66 19.4 295 265.8

COMEX 31 44 13 41.9 34 340.0

SHFE* 18 19 1 5.6 -30 -61.2

Total 389 469 80 20.6 299 175.9 Source: Cochilco, based on Exchange reports. N.B.: Inventories at the end of each term. *As of last Thursday of term.

The IMF issued a gloomier revision of its

global economic outlook for 2009 and 2010.

Absolute Comex and SHFE increases were

minimal.



not as clear in economies with a high public debt, such as the U.S. Echoing its January report, the IMF emphasizes that the best way to address the crisis is through coordinated monetary, fiscal and financial policies designed to build financial sector confidence.

In January-April 2009 the world economy remained in deep recession. Notwithstanding the strong crisis-fighting measures adopted by major world economies, prospects remain uncertain.

Still, risks facing world economic activity seem to be slowly easing. While no clear signs of improvement are yet forthcoming, the pace of decline seems to have slowed down, as reflected in a moderate recovery in major stock indexes.

Below is a summary of measures adopted by leading economies in the period under review:

• In the U.S., the Fed kept rates within the 0-0.25 percent target set in December with a view to supporting financial markets and stimulating the economy. In January the federal government introduced a $787-billion stimulus package which included $120 and $48 million for investment in infrastructure and energy, respectively, consumer tax cuts, and the purchase of long-term Treasury securities.

• At its March meeting, the European Central Bank (ECB) cut interest on

leading financing transactions by 50 basis points to 1.50 percent, adding an extra 25 basis points in early April. According to monthly ECB reports, available data suggests that economic activity in the Eurozone remains weak. While this state of affairs should not improve in 2009, a gradual recovery is expected in 2010.

• At its last quarterly meeting, the Bank of Japan left its 0.1 percent

target rate unchanged.

In spite of decidedly expansive policies, the strong downturn has kept inflationary pressures on the moderate side.

While the PMI Index has recovered somewhat from last year’s lows, it remains mired below the 50-point expansion/contraction cutoff. This suggests that manufacturing conditions will not be rebounding any time soon.

The U.S. PMI Index averaged 35.9 points in Q1, slightly below the 36-point average posted in Q4 2008 but still better than the 32.9-point low posted in December. In China, the PMI Index for March (52.4) marked a clear return to the expansion zone after the 38.8-point low posted in November. In late Q1 the European Union racked up its tenth consecutive month within the contraction zone. The EU PMI Index rebounded slightly in January (34.4), fell in February, then rebounded slightly again in March (33.9).

U.S. industrial output in Q1 was down 20 percent year-on-year, the largest quarterly loss since the start of the crisis. Analysts polled by the April issue of Consensus Forecast (see Table 2) predict that U.S. industrial output will decline 9.7 percent this year, a significantly more pessimistic outlook than the

…manufacturing indexes for the U.S., China and

the European Union continue to suggest a

continued contraction.

The world economy remains in deep recession. While

government measures provide a modicum of

stability…



5.4 percent drop estimated in December. A 1.7 percent rebound expected in 2010 is also lower than the 2.3 percent increase predicted in December.

Incipient stability in the U.S. housing sector, a major copper user, may well help spearhead a recovery going forward. Housing starts jumped an unexpected 22 percent in February, then dropped 10.8 percent in March, for a total 510,000 units. Analysts polled by Consensus Forecast expect housing starts in 2009 to come in at about 560,000 units, 6.7 percent lower than previously estimated. For 2010 they predict some 790,000 units, down a significant 17.7 percent over their December forecast.

The global slowdown has meant tough times for car companies worldwide. Among these, U.S. carmakers are a particularly troubled lot. Car sales in the U.S. in January-March stood at 2.2 million units, a 38.3 percent decline year-on-year. Posting the largest losses was General Motors, whose March sales plunged 45 percent from a year earlier, followed by Ford with 40.9 percent and Chrysler with 39 percent.

In the European Union (EU15), industrial activity fell 18.4 percent in February from a year earlier. However, the slump has tapered off since last December’s 2.9 percent historic low. Consensus Forecast predicts an average 13.7 percent decline in expected industrial activity in 2009, a strong downward revision from its 4.7 percent December forecast. In Germany, the largest EU economy, industrial growth in 2008 was completely flat. For 2009, Consensus Forecast anticipates a 14.4 percent decline, well below its 5.7 percent December estimate. For 2010 the publication predicts a moderate 1.3 percent recovery, also below its 1.5 percent December forecast.

Housing construction in the European Union (EU15) has been sliding apace since March 2008. Recent reports show that the 10.9 percent decline posted at year-end 2008 grew to 11.3 percent in February 2009.

In China, industrial output went from a modest 3.8 percent in January-February to a strong 8.3 percent in March, totaling 5.1 percent year-on-year Q1 growth. Analysts polled by Consensus Forecast predict 8.3 percent growth in 2009, slightly below the 8.5 percent forecast in December. Estimates for 2010 rose from 11 to 11.2 percent.

The Chinese GDP grew 6.1 percent in Q1 over the previous quarter, the weakest performance since record-taking began in 1992 and slightly below the 6.3 percent expected by the market. In line with the 8.5-percent target set by the Chinese government, a stronger rebound is expected this year. This view is borne out by the results of the stimulus package approved late last year, which helped increase year-on-year investment on infrastructure by 26.5 percent in January-February and 28.6 percent in March.

National Bureau of Statistics data on key Chinese copper user sectors in Q1 2009 shows a notorious decline, notably in power generating equipment (down 24.5%; up 2.7% in 2008), followed by air conditioning (down 23%; up 3.7% in 2008) and electrical motors (down 18.1%; up 5% in 2008). Less significant declines were posted by electricity generation (down 7.5% in Q1

Conditions in large copper consumer

sectors in the U.S. have worsened relative to our

previous report…

…leading to a steeper downward revision of

conditions in the European Union.

Conditions for Chinese exporters and large copper users are no

better…



2009; up 2.3% in 2008). Increases were led by motor vehicles (up 3.5% in Q1 2009; up 8.2% in 2008) and computers (up 0.6% in Q1 2009; up 21.8% in 2008).

The Japanese economy remains in the doldrums. After falling 3.3 percent in 2008, analysts expect industrial output to drop even further in 2009. Consensus Forecast anticipates this at 29 percent, a drastic revision of the 10.2 percent envisaged in December. The 3.4 percent rebound expected in 2010 is an improvement over the 1.8 percent predicted three months ago.

The contraction is evident in copper cable production, a leading indicator of Japanese demand. The yearly decline stood at 32.5 percent in February, following a 46.4 percent drop in exports and a 32 percent domestic market contraction, notably scant demand from carmakers (down 60.7% from collapsing exports) and electrical machinery (down 50.5%).

Table 2: Industrial Growth 2007 2008 2009(E) 2010(E) China 18.5 12.9 8.3 11.2 U.S. 1.7 -2.2 -9.7 1.7 Japan 2.9 -3.3 -29 3.4 European Union 3.4 -1.8 -13.7 0.4

Germany 5.8 0 -14.4 1.3 Italy -0.2 -4.3 -12.4 -0.1

South Korea 6.9 3.0 -9.5 5.3 Chinese Taipei 8.3 -1.6 -15.1 5.8 India 8.5 3.1 3.1 6.8 Source: Consensus Forecast, 14 April 2009. (E) Expected.

Dwindling exports and shrinking domestic demand have had a particularly strong impact on export-oriented economies such as Japan and the European Union. In China, however, the impact should be cushioned by the growing effect of fiscal stimulus measures in H2.

2.2. Refined Copper Demand

The International Copper Study Group (ICSG) places world refined copper consumption in 2007 at 18.2 MMT, up 6.5 percent (1.1 MMT) from a year earlier (see Table 3). The increase came mainly from China (1.3 MMT), slightly offset by declines everywhere else, notably NAFTA countries (98 kMT) and the European Union (239 kMT).

As opposed to other large consumers, the ICSG determines Chinese demand based on apparent consumption, which factors in both consumption and invisible inventory buildup.1 This information is revised regularly based on new Chinese data on the components of demand. This helps explain why the figure for 2007 underwent a 400 kMT upward revision.

1 Determined by adding production and net imports and subtracting net changes in visible inventories.

…than in Japan as foreign demand

collapses.

Copper demand grew 6.5 percent in 2007,

driven mainly by a strong China.



This method is required by the lack of official data and the market relevance of changes in China’s invisible inventories. Uncertainty about Chinese inventory buildup policies and constantly shifting copper demand estimates, compounded by China’s role in global demand, highlight the challenges inherent in accurately predicting world demand.

Refined copper consumption estimates for 2009-2010 reflect the rapidly deteriorating prospects noted in Section 2.1. Combined growth is expected to stand at 342 kMT, mostly in 2010. Increases should be led by China (417 kMT) and the United Arab Emirates (206 kMT), largely offset by declines in the EU (164 kMT), the U.S. (150 kMT), and Japan (118 kMT), to name a few.

World refined copper consumption in 2008 stood at about 18 MMT, down 1 percent (185 kMT) over 2007 (Table 3). Accounting for most of the decline was Europe (247 kMT), specifically the EU (203 kMT, notably Italy), followed by North America (198 kMT, notably the U.S. with 187 kMT). These losses were partially offset by increases in Asia (197 kMT), mainly China (241 kMT) and the UAE (49 kMT), followed by Latin America (40 kMT), notably Brazil (59 kMT). Demand in Africa and Oceania should rise by 19 and 4 kMT, respectively.

Relative to our previous report, demand in 2008 grew by 37 kMT, led by China (194 kMT) and Brazil (36 kMT). Gains were largely offset by declines in the EU (69 kMT), Poland (41 kMT), Russia (40 kMT), and Japan (36 kMT). Most losses in the EU and Japan were caused by declining industrial activity.

Table 3: Annual Refined Copper Demand kMT 2007 (I) 2008 (E) 2009 (E) 2010 (E)

Demand ± % Demand ± % Demand ± % Demand ± %

China 4,957 36.5 5,198 4.9 5,360 3.1 5,615 4.8

European Union 3,624 -6.2 3,421 -5.6 3,045 -11.0 3,257 7.0

United States 2,137 0.3 1,950 -8.8 1,700 -12.8 1,800 5.9

Japan 1,252 -2.3 1,184 -5.4 907 -23.4 1,066 17.5

South Korea 821 1.1 780 -5.0 760 -2.6 800 5.3

Russian Federation 671 -3.0 650 -3.1 630 -3.1 655 4.0

Chinese Taipei 603 -5.6 582 -3.5 551 -5.3 568 3.1

India 475 8.0 500 5.3 525 5.0 550 4.8

Turkey 358 18.5 360 0.6 360 0.0 375 4.2

Brazil 330 -2.7 389 17.9 375 -3.6 390 4.0

Mexico 340 -2.9 325 -4.4 305 -6.2 318 4.3

Poland 297 11.2 267 -10.1 257 -3.7 264 2.7

Egypt 134 24.1 157 17.2 170 8.3 215 26.5

Thailand 250 -4.2 245 -2.0 235 -4.1 240 2.1

Saudi Arabia 190 0.0 192 1.1 205 6.8 240 17.1

Leading Buyers 16,439 7.4 16,200 -1.5 15,385 -5.0 16,353 6.3 Rest of World 1,735 -1.7 1,789 3.1 1,842 3.0 1,978 7.4

Other 18,174 6.5 17,989 -1.0 17,227 -4.2 18,331 6.4 Source: ICSG Copper Bulletin, Cochilco estimates based on Consensus Forecast, Brook Hunt and CRU. N.B.: (i) Interim, (E) Expected.

Additional copper demand in 2009-2010 is

estimated at only 342 kMT.

The industrialized country slowdown drove 2008 demand down by an expected 1 percent.



Refined copper demand in 2009 should drop 4.2 percent (762 kMT), leaving the total at slightly above 17.2 MMT (see Table 3). While demand is expected to increase in Africa (11 kMT), a 59 kMT drop is expected in Asia, mostly Japan (277 kMT), plus other minor drops in Chinese Taipei and South Korea.

Drops expected everywhere else are larger than previously anticipated (see below), led by Europe (407 kMT, principally 376 kMT in the EU); followed by North America (268 kMT, mainly a strong 250 kMT contraction in the U.S.); with Latin America and Oceania (36 and 3 kMT, respectively) a distant third.

The only countries expected to post significant increases in 2009 are China (162 kMT) and the UAE (101 kMT). The Chinese figure could be larger, as it does not include the strategic inventory buildup noted in Section 4.2.

Relative to our previous report, estimated demand for 2009 is down a considerable 743 kMT. These reductions, reflecting downward corrections to estimates for the European Union (305 kMT), Japan (258 kMT) and the U.S. (150 kMT), among others, are a direct consequence of the sharp slump most industrialized economies are expected to keep laboring under.

For 2010 we expect a strong 6.4 percent (1.1 MMT) recovery in refined copper demand, taking the total to above 18.3 MMT (see Table 3). Growth should be led by Asia (668 kMT), notably China (255 kMT), Japan (159 kMT) and the UAE (105 kMT), followed by Europe (248 kMT), notably the EU (212 kMT, led by Germany and Italy). North American demand should recover by 108 kMT, led by a recovering U.S., followed by increases in Africa (47 kMT), Latin America (31 kMT), and Oceania (2 kMT).

Relative to our last report, expected demand for 2010 is up 263 kMT. These increases reflect upward corrections to estimates for China (265 kMT), South Korea (70 kMT), and Egypt (55 kMT), to name a few. Expectations have worsened for Europe (down 164 kMT, notably the European Union, followed by Poland and Russia) and Japan (down 84 kMT).

In short, expected demand for 2009 drops relative to our previous report, reflecting the strong impact of the crisis on industrialized economies. While China should continue driving world demand, it cannot by itself make up for lost demand elsewhere. In 2010, China’s relative strength and an incipient rebound in the world economy should help copper demand rally. However, actual prospects still hinge on the crisis-fighting measures adopted by industrialized nations and their effect on the financial sector and the real economy. These policies will dictate whether or not copper finds a springboard from which to rebound. While some signs of improving confidence have been seen in April 2009, these remain fragile.

Demand in 2009 should shrink by 4.2 percent…

In short, copper demand has been severely hit by

worsening economic conditions.

…then rebound a strong 6.4 percent in 2010.



3. Copper Supply

3.1. World Mine Production

World mine production in 2008 stood at 15.69 MMT, a 1.5 percent or 232 kMTF increase from a year earlier (see Table 4).

While 2008 mine production increases (see Table a) were previously estimated to be evenly shared by concentrate and electro-won (SX-EW) copper, in fact 90 percent of increases were reported by SX-EW plants, with concentrate operations reporting much higher losses than expected.

Most production losses were sustained in Chile, notably by Escondida (lower grades, mine planning issues, SAG mill failure at the Laguna Seca Concentrating Plant) and Codelco Norte (lower grades and slope stability issues forcing a slowdown). Labor issues and severe winter weather conditions led other Codelco-Chile divisions to sustain additional operating losses.

Table (a): Leading Operating Changes in 2008 kMTF Concentrate SX-EW

Startup: Phu Kham (Laos): 30

Gabriela Mistral (Chile): 70 Safford (U.S.): 65

Production increases:

Frontier (Congo DR): 70 Cerro Verde (Peru): 65 Smaller operations (China): 63 Pinto Valley (U.S.): 50 Kansanshi (Zambia): 45 Bingham Canyon (U.S.): 25

Spence (Chile) Escondida Low-grade sulfides (Chile) Lady Annie (Australia): 20

Production gains (losses):

Grasberg (Indonesia): - 91 Cananea (Mexico): - 79 Batu Hijau (Indonesia): - 48

Morenci (U.S.): - 60

Source: ICSG Copper Bulletin and Cochilco estimates based on Brook Hunt, CRU and company data.

Relative to our previous report, 2008 production is up 31 kMTF due principally to fewer expected losses and unforeseen increases in Chile, Peru, and Canada. These were partly offset by lower production at various facilities around the world, including Grasberg and Batu Hijau in Indonesia (for a combined 28 kMTF); Pinto Valley and Ray in the U.S. (25 kMTF), and Mount Isa in Australia(23 kMTF).

Mine copper production stood at 15.7 MMT in

2008…



Table 4: World Mine Production

KMT 2007 2008 2009 (E) 2010 (E) Production ± Production ± Production ± Production ±

Chile 5,557 196 5,330 -227 5,407 77 5,750 343 United States 1,200 -13 1,351 151 1,184 -167 1,166 -18

Peru 1,115 75 1,215 100 1,216 1 1,193 -23

China 927 22 1,030 103 1,072 42 1,109 37

Australia 871 -30 884 13 1,044 160 1,064 20

Russian Federation 691 15 719 28 702 -17 715 13

Canada 589 -14 663 74 674 11 709 35

Indonesia 789 -28 650 -139 855 205 965 110

Zambia 530 48 591 61 631 40 692 61

Kazakhstan 454 -4 457 3 465 8 460 -5

Poland 452 -39 450 -2 450 0 450 0

Mexico 320 -18 247 -73 247 0 369 122

Congo DR 159 45 237 78 361 124 469 108

Iran 221 18 236 15 239 3 238 -1

Brazil 212 67 217 5 220 3 223 3

Other 1,376 51 1,418 42 1,601 183 1,657 56

Total 15,464 391 15,695 232 16,368 673 17,229 861

Expected Loss (1) 0 0 -824 -867 Total Available 15,464 391 15,695 232 15,544 -151 16,362 818

Percent Change 2.6 1.5 -1.0 5.3

Source: ICSG Copper Bulletin and Cochilco estimates based on Brook Hunt, CRU and company data. (E) Expected. (1) Refers only to remainder of 2009.

After expected losses, mine production in 2009 should stand at 15.54 MMT, down 1.0 percent (151 kMTF) over 2008 (see Table 4). The reduction reflects industry reaction to falling copper prices, notably major production cuts at worldwide operations starting in late 2008 and continuing through early this year.

These cuts are evident in lower production increases reported by major producer countries, including Chile (77 kMTF vs. 195 kMTF), Zambia (40 kMTF vs. 164 kMTF), Peru (1 kMTF vs. 21 kMTF), and Canada (11 kMTF vs. 37 kMTF), as well as in larger cuts in the U.S. (167 kMTF vs. 21 kMTF). Leading changes are shown on Table b.

…and is expected to slide 1 percent to 15.5

MMT in 2009…



Table (b): Leading Expected Operating Changes in 2009 kMTF Concentrate SX-EW

Startup:

Lumwana (Zambia): 160 Prominent Hill (Australia): 83 Mount Isa(Australia): 48 Huelva (Spain): 32

Tenke Fugurume (Congo DR): 40 Las Cruces (Spain): 39


Collahuasi (Chile) Phu Kham (Laos): 30

2nd Stage Gabriela Mistral (Chile) Spence (Chile) Escondida Low-grade sulfides (Chile) Ruashi Etoile (Congo DR): 35

Production gains (losses):

Codelco-Norte (Chile) Grasberg (Indonesia): 139 Batu Hijau (Indonesia): 66

-


Relative to our previous report, production should drop off by nearly one third of a million tons, reflecting continued production cuts by mining companies, notably U.S.-based Freeport McMoRan. Leading drops between reports are as follows:

i. United States: 156 kMTF, due to additional production cuts at Morenci and closure of Pinto Valley;

ii. Zambia: 121 kMTF, due to the Mufulira and Nkana/Chibuluma closures and cuts at smaller operations;

iii. Chile: 64 kMTF from various operations, mainly concentrate plants.

All news from the mine production front suggest that the situation remains in flux and that production estimates are prone to error. Based on this and on a historic review, for 2009 we stand by an expected production loss factor of 5 percent.

World mine production in 2010 should grow 5.3 percent (818 kMTF) over 2009, closing at 16.36 MMT (see Table 4). Concentrate should account for slightly below 77 percent (see Table c).

Relative to our previous report, production expectations for 2010 are cut by 74 kMTF, reflecting additional cuts announced by mining companies earlier this year. Leading drops between reports mirror the above expectations for 2009, as follows:

i. United States: 193 kMTF, due to additional production cuts at Morenci and closure of Pinto Valley;

ii. Zambia: 119 kMTF, due to the Mufulira and Nkana/Chibuluma closures and cuts at smaller operations;

iii. Australia: 60 kMTF, due to production deferments and/or cuts at Mt. Gordon, Osborne and Lady Annie.

iv. Chile: 49 kMTF from various operations, mainly concentrate plants.

World mine production should rebound to 16.4

MMT in 2010.

…based on production cut announcements by

mining companies.



Table (c): Leading Expected Operating Changes in 2010 kMTF Concentrate SX-EW

Startup:

Andacollo Sulfide Project (Chile) Konkola Deep (Zambia): 40 Kamoto (Congo DR): 30

-


Andina Division (Chile) Escondida (Chile) El Teniente (Chile) Los Pelambres (Chile) Candelaria (Chile)

Spence (Chile) Escondida Low-grade sulfides (Chile) Tenke Fugurume (Congo DR): 60 Las Cruces (Spain): 39

Production gains (losses): Grasberg (Indonesia): 90 Batu Hijau (Indonesia): 20 Cananea (Mexico): 70

Cananea (Mexico): 35


Additional cuts in 2010 are partly offset by fewer expected production losses. These are revised from 1.24 kMTF (7%) in our previous report to 867 kMTF (5%), based on two factors:

(a) Considerably lower risk of downtime related to equipment malfunction as production is cranked up to leverage high prices;

(b) Recent market conditions. Although prices remain well below the average of the previous years, they have rebounded above late 2008 levels. Improving short- and medium-term conditions may prompt miners to reopen facilities shut down or put on extended maintenance in recent months.

3.2. Chilean Mine Production

Final figures show that Chilean mine production in 2008 (see Table 5) stood at 5.33 MMT, down 4.1 percent (227 kMTF) from a year earlier but up from the 5.27 MMT figure provided in our previous report.

Chilean mine production in 2009 is expected to stand at 5.4 MMT (66 kMTF below our January estimate), up 1.4 percent (77 kMTF) over 2008.

Table 5 shows Chilean mine production in January-February 2009 relative to January-February 2008. Accounting for the 6.3 percent (54 kMTF) production loss is lower production at Codelco (15 kMTF or 10.9%) and Escondida (60 kMTF or 12.4%). These losses were partially offset by increases at Gaby (25 kMTF), on stream since May last year.

These figures are indicative of expectations through 2009. The operating issues identified in H2 2008 should keep H1 production at Escondida and Codelco Norte down, then recover in H2.

Chilean mine production fell 4.1 percent to 5.33

MMT in 2008…



Table 5: Chilean Mine Copper Production 2008 Jan-Feb

kMT Total ± 2008 2009 ± Codelco Norte 755 -141 119 108 -11 Salvador 43 -21 10 10 0 Andina 220 2 38 35 -3 El Teniente 381 -24 63 61 -2 Codelco 1.399 -184 229 214 -15 Escondida 1.254 -230 217 157 -60 Collahuasi 464 12 74 78 4 Los Pelambres 351 51 52 54 2 Anglo American Sur 284 -18 48 39 -9 El Abra 166 0 26 26 0 Candelaria 174 -7 24 24 0 Anglo American Norte 149 -3 25 24 -1 Zaldívar 134 -9 22 23 1 Cerro Colorado 104 5 19 17 -2 El Tesoro 91 -2 16 13 -3 Quebrada Blanca 85 2 14 14 0 Lomas Bayas 59 -2 9 12 3 Michilla 48 3 8 8 0 Spence 165 37 27 32 5 Gaby 71 71 - 25 25 Other 334 49 48 43 -5

CHILE 5.330 -227 856 802 -54 Source: Cochilco, based on company reports. N.B.: All figures rounded. Production increases are expected to come from expanded capacity at Collahuasi (first expansion stage, operational improvements) and Gaby (expansion start), in addition to new production from Spence, Escondida’s low-grade sulfides (yet to achieve design capacity), and an expected recovery at Codelco divisions.

Chilean mine production in 2010 is estimated at 5.75 kMTF (49 kMTF below our January estimate), a 6.3 percent (343 kMTF) increase over 2009 and better than the all-time peak posted in 2007.

Increased concentrate production is associated with expanded capacity at Andina, Escondida, El Teniente, Los Pelambres and Candelaria plus startup of the Andacollo Sulfide Project. Increases in SX-EW copper should come from capacity production at Spence and startup of the Escondida Sulfide Leach Project.

…but should grow 1.4 percent to 5.4 MMT in

2009…

…them expand 6.3 percent in 2010, besting

its 2007 all-time peak.



3.3. Refined Copper Supply

In 2008 the world refined copper supply stood at 18.0 MMT, up 0.8 percent (143 kMT) over 2007 (see Table 6). Most increases came from primary (electro-refined and electro-won) production, which stood at 15.36 kMT, up 1.6 percent year-on-year. These gains came mainly from SX-EW (209 kMT or 6.9%) and from increases in electro-refined production (30 kMT or 0.2%).

Relative to our previous report, our estimate is revised to 10 kMT due to a lower secondary supply (-41 kMT), partially offset by increases in the primary supply (+31 kMT).

In 2008, refined production from scrap stood at 2.64 MMT, down 3.5 percent (96 kMT) from a year earlier. The reduction is due to low scrap availability caused by both a slumping economy and lower year-end copper prices.

The total refined copper supply for 2009 should stand at 17.76 MMT, down 1.3 percent (235 kMT) year-on-year. The reduction is 60 percent due to a lower primary supply (143 kMT, as production cuts reduce electro-refined availability) and 40 percent due to lower secondary refined production (92 kMT). Our estimate relative to our last report is down 417 kMT following drops in the primary and secondary supply (106 kMT and 312 kMT, respectively).

Total refined copper production for 2010 should stand at 18.65 MMT, a 5 percent increase (888 kMT) from a year earlier. Gains should be led by an 801 kMT (5.3 %) primary production increase directly connected with the increased mine production noted in Section 3.1. As the global economy should recover (as noted in Section 2) while prices remain low, secondary production is expected to increase only 87 kMT, below the gains posted in previous years.

Vis-à-vis our last report, our estimate is down 12 kMT due to a lower primary supply (72 kMT), partially offset by higher secondary production (62 kMT).

While predictions about secondary production vary widely, there is some consensus on expecting the global slowdown and lower prices to result in reduced scrap availability this year. The outlook should improve next year, as a rebounding global economy starts producing more scrap.

Table 6: Refined Copper Production KMT 2007 2008(E) 2009(E) 2010(E)

Production ± Production ± Production ± Production ±

Electro-Refined 12,096 184 12,126 30 11,950 -176 12,564 614

Electro-Won 3,026 209 3,235 209 3,268 33 3,455 187

Primary Refined 15,123 392 15,361 239 15,218 -143 16,019 801

Secondary Refined 2,737 159 2,642 -96 2,550 -92 2,637 87 Total Refined 17,860 552 18,003 143 17,768 -235 18,656 888 Percent Change 3.2 0.8 -1.3 5.0 Source: Cochilco, based on ICSG Copper Bulletin, Brook Hunt, and producer company data. (E) Expected.

The refined copper supply in 2008 grew

only 0.8 percent.

For 2009 it is expected to fall 1.3 percent…

…then recover strongly by 5 percent or 888 kMT

in 2010.



4. Market Balance and Price Outlook

4.1. Market Balance

The refined copper market balance shown in Table 7 below is based on demand and supply data reviewed in Sections 2 and 3, respectively.

Based on Chinese demand data, we have revised our January estimate for 2007 from a 106 kMT surplus to a 314 kMT shortfall. In relative terms, closing inventories stood at 2.9 consumption weeks, well below the previously estimated 4.2 weeks.

For 2008 we still estimate a relatively balanced market with a surplus growing to 14 kMT from the 61 kMT noted in our previous report. The tighter 2007 market is reflected in relative inventories closing at 3.4 consumption weeks, below the previously estimated 4.0 weeks.

Our surplus estimate for 2009 is revised upward from 215 kMT to 541 kMT as sliding global growth leads to lower projected demand, as noted in Section 2. We stand by our estimate of relative inventories closing at 4.1 consumption weeks.

For 2010, our surplus estimate drops from 599 kMT to 325 kMT with relative inventories closing at 4.1 consumption weeks, below the previously estimated 4.7 weeks.

4.2. Price Outlook for 2009-2010

Copper prices have stayed above US$2/lb. since mid-April, an unusual rise caused by China’s strategic inventory buildup and by a scrap shortage leading to increased demand for refined copper. Copper has done better than other base metals (see Section 1, Chart c) and so have these relative

Table 7: Refined Copper Market: Projected World Balance kMT 2007 (I) 2008 (E) 2009 (E) 2010 (E)

Primary Refined Production 15.123 15.361 15.218 16.019 Secondary Refined Production 2.737 2.642 2.550 2.637 TOTAL SUPPLY 17.860 18.003 17.768 18.656 Percent Change 3,2 0,8 -1,3 5,0 TOTAL DEMAND 18.174 17.989 17.227 18.331 Yearly Change 6.5 1.5 -4.2 6.4 BALANCE -314 14 541 325 Inventories as Demand Weeks 2.9 3.4 4.1 4.1 Source: Cochilco, based on ICSG Copper Bulletin, Brook Hunt, CRU and producer company data. N.B.: (i) Interim, (E) Expected.

…a surplus is expected in 2009, followed by

increased tightness in 2010.

While the market was mostly balanced in

2008…

The market balance for 2007 shows a 314 kMT

shortfall.



to other key commodities, including oil, steel, and even the stocks of Dow Jones Industrials firms.

Late last year China’s SRB posted notice of its strategic base metal purchase plans. The 300-kMT copper purchase target for 2009-2011 first reported in mid-February was later updated to 400 kMT and major recent acquisitions were acknowledged.

Copper market analysts feel that Chinese import data shows that most of the target was bought in the early part of the year. As noted, these purchases appear to account for a good part of the strong gains made by copper prices in 2009.

As the dearth of hard data on China’s annual base metal targets renders any estimate highly speculative, our balance (see Table 7) refrains from including an explicit assessment of such purchases. However, should analyst estimations for this year (about 300 kMT) prove accurate, the market would be tighter than predicted in Section 4.1, consistent with this year’s “unexpected” rebound in prices.

In short, similar to our January estimate, we expect the market to close at relatively normal levels, with total inventories on the order of 4.1 consumption weeks. Based on slowly easing pressure from strategic Chinese purchases and depressed demand from the rest of the world, we project a price average of about 175 ¢/lb., below current levels but above our previous estimate.

As noted in Section 4.1, in 2010 the market balance surplus and closing inventory levels should come in below our previous estimations. Our consumption weeks estimate is also revised from 4.7 to 4.1. However, since the global crisis has yet to show clear signs of letting up, the timid rebound of March-April -based as it is on short-term indicators- may lead to underestimating the depth and duration of the crisis and to overestimating the future prospects of copper prices. A more likely prospect for the world economy is a gradual recovery precluding a significant rebound in copper demand before H2 2010.

While the global turbulence has eased somewhat, it is far from gone and may yet get in the way of recovery. The Economist, for one, notes banking write-downs among key sources of potential risk this year. On the other hand, government spending programs still need time to show their effectiveness. So far such measures seem to have partially slowed down the slump but have yet to impact demand in a way that paves the way for sustainable recovery.

A tighter market prompts us to revise our average price estimation for 2010 upward to 170 ¢/lb., below our projection for 2009. This view is grounded on expectations of low global growth, a significant 818 kMT increase in the copper supply, and lower inventory buildup activity by China following major purchases in 2009.

…and have revised our average price estimate

to 170 ¢/lb.

…and as a result have revised our average

price estimate for 2009 to 175 ¢/lb.

For 2010 we expect increased tightness as

well as continued uncertainty…

We have carefully noted the factors

behind current price gains…



5. World Smelting Industry

5.1 World Smelter Production

In 2008 primary smelter production stood at 12.62 MMT, up 0.4 percent or 47 kMTF year-on-year (see Table 9), chiefly as a result of a 54 kMTF increase in concentrate smelting in Asia and Europe. Albeit to a lesser extent than in past years, in 2008 Africa continued expanding its smelting capacity.

Lower capacity utilization in the Americas and increased capacity in Asia (mainly in China, up 5.1 percent in 2008) led to Asian smelters producing 47.5 percent of the world total. Chilean smelter production has been falling steadily from its 1.6 MMT peak in 2005-2006. Production in 2008 stood at 1.4 MMT, down 9.6 percent year-on-year.

The new figures show that production in 2008 came in 121 kMTF below our estimate. Accounting for the drop is lower production in Europe (48 kMTF, notably Germany and the Russian Federation), the Americas (43 kMTF, principally lower Codelco-Chile production) and Africa (32 kMTF in Congo DR and Zambia). Oceania and Asia were mostly unchanged from our previous report.

Smelter production in 2009 should stand at 12.01 MMT, down 4.8 percent (611 kMTF) from a year earlier. Accounting for the drop are production cuts announced in Asia (53 kMTF) and Europe (35 kMTF), and most importantly, smelter adjustments to the global economic outlook (597 kMTF). These cuts and adjustments reflect the range of strategies adopted by smelters to address a complicated concentrate market.

Leading causes for smelter production adjustments include the following:

i. Concentrate shortage: As mine production declines, smelters are cutting capacity utilization rates or planning or moving up extended preventive maintenance.

ii. Sulfuric acid glut: As demand plummets, some smelters face a major sulfuric acid glut. Unable to store the sulfuric acid obtained as a byproduct, these operations may be forced to cut production.

iii. Cost savings: Despite rising treatment and refining charges (TC/RC), falling sulfuric acid and copper prices have cut into smelter profits, leading some to consider production cuts or temporary shutdowns.

iv. Operating Issues: Unplanned disruption risks associated with accidents, power supply, input availability, logistic issues, etc.

Smelter production in 2009 is expected to come in 594 kMTF below our previous report. Drops are expected across all continents except Oceania, as follows: Asia: 639 kMTF, mainly China (209 kMTF), Japan (180 kMTF), and India (155 kMTF); Americas: 321 kMTF, mainly Mexico (111 kMTF), the U.S. (104 kMTF), and Chile; Africa: 191 kMTF, mainly Congo DR (101 kMTF) and Zambia (80 kMTF); and Europe: 190 kMTF, mainly the Russian Federation (105 kMTF), in addition to smaller cuts elsewhere.

…and should drop nearly 5 percent in 2009…

In 2008 primary smelter production grew a mere

0.4 percent…



In 2010, primary smelter production should stand at 12.96 MMT, an almost 8 percent annual increase. As above, this forecast factors in expected production losses and reduced capacity utilization rates. These adjustments should account for about 7 percent (923 kMTF) of production, expected concentrate production losses included.

While Asian smelting capacity this year should account for about 58 percent of overall production increases, down the road this should modulate as available smelter capacity rises and refined copper prices fall.

Lower production than previously anticipated is expected across all continents except Oceania, as follows: Americas: 285 kMTF, notably the U.S. (152 kMTF) and Mexico (60 kMTF); Asia: 251 kMTF, mainly India (123 kMTF) and Japan (58 kMTF); Africa: 189 kMTF, including 101 kMTF in Congo DR and 77 kMTF in Zambia; and Europe: 181 kMTF, notably 75 kMTF in the Russian Federation, 75 kMTF in Poland, and smaller cuts elsewhere.

Table 9: World Primary Copper Smelter Production KMT 2007 2008 (E) 2009 (E) 2010 (E)

Production ± Production ± Production ± Production ±

Africa 587 113 624 36 670 47 823 152 Americas 3,325 -227 3,193 -132 3,197 4 3,395 198

Asia 5,949 392 6,002 54 5,949 -53 6,690 741

Europe 2,333 -123 2,388 54 2,352 -35 2,482 130

Oceania 386 -20 421 35 445 24 495 50

Total 12,580 135 12,628 47 12,614 -13 13,885 1271 Smelter Adjustments 0 0 597 923

Total Available 12,580 135 12,628 47 12,017 -611 12,962 945

Percent Change 1.0 0.4 -4.8 7.9

Source: Cochilco, based on Brook Hunt data. (E) Expected

5.2 World Concentrate Production

World concentrate production in 2008 stood at some 12.46 MMT (see Table 10), up 23 kMTF (0.2%) over 2007. Accounting for the meager increase is lower concentrate production in the Americas, notably Chile (227 kMTF) and Mexico (73 kMTF), as noted in Section 3.

Production in 2009 is expected to drop to 12.27 MMT, down 1.5 percent (184 kMTF) over 2008. Key factors include the lower mine production and expected losses noted in Section 3.

Production in 2010 is expected to stand at 12.90 MMT, up 5.1 percent (631 kMTF) year-on-year, with significant growth in the Americas, Asia, and Africa.

Led by Latin America, in 2008 the Americas remained the leading producer region with a share of almost 51 percent, followed by Asia with 22 percent.

World concentrate production grew a mere

0.2 percent in 2008…

… then fell 1.5 percent in 2009…

…then rebound a strong 8 percent in 2010.



Chile, with about 27 percent of the total, remained world leader, followed by Peru (8.5%) and China (8%).

Table 10: World Copper Concentrate Production 2007 2008 (E) 2009 (E) 2010 (E)

kMTF Production ± Production ± Production ± Production ±

Africa 626 62 786 160 844 58 922 78 Americas 6,562 138 6,397 -165 6,266 -131 6,664 398

Asia 2,739 40 2,772 33 3,099 327 3,213 114

Europe 1,498 -27 1,503 5 1,565 62 1,607 42

Oceania 1,012 -31 1,002 -10 1,172 170 1,205 33 Total 12,437 182 12,460 23 12,946 486 13,611 665 Concentrate Losses 0 0 670 704 Total Available 12,437 182 12,460 23 12,276 -184 12,907 631 Percent Change 1.5 0.2 -1.5 5.1

Source: Cochilco, based on ICSG, Brook Hunt and company data. (E) Expected. 5.3 Concentrate Market Balance

Based on expected smelter and concentrate production, the world concentrate market closed 2008 with a 167 kMTF shortfall (see Table 11), 24 kMTF higher than the shortfall of 2007.

In 2009 the market should show a 259 kMTF surplus as smelter cuts exceed concentrate losses. Processing capacity has fallen drastically in recent months as smelters weather the crisis by shutting down, moving or extending maintenance, reducing production lines, etc. Comparison of the current forecast and our previous 135-kMTF shortfall estimate illustrates the situation.

Table 11: World Copper Concentrate Surplus/Deficit kMTF 2007 2008 (E) 2009 (E) 2010 (E)

Africa 39 162 174 99 Americas 3,237 3,205 3,069 3,269 Asia -3,209 -3,230 -2,850 -3,477 Europe -835 -885 -787 -875 Oceania 626 581 727 710

Subtotal -143 -167 332 -274 Concentrate Losses 0 0 670 704 Smelter Adjustments 0 0 597 923

Total -143 -167 259 -55 Source: Cochilco, based on above charts. (E) Expected.

Adjustments to smelter production, both

underway and planned, should lead

to a major surplus in 2009…

…but should rebound a strong 5.1 percent in

2010.



The 2010 concentrate market is expected to be tight but less so than in previous years, with a 55-kMTF estimated shortfall. This figure reflects greater smelter flexibility relative to mine production, as smelters possess an installed capacity that can be quickly marshaled as soon as the market improves.

5.4 Treatment and Refining Charges (TC/RC)

The 2007 concentrate market deficit carried over into 2008, pushing supply contract treatment and refining charges down to 45/4.5 in H1 and 42.5/4.25 in H2. These TC/RC followed protracted negotiations in which smelters strongly but unsuccessfully argued for a return to price participation. Spot contract fees in 2008 closely tracked developments in 2007, sliding in H1 until hitting bottom at 8/0.8 in July, then recovering sharply at year-end.

Spot TC/RC charges stood at 80/8 in January 2009 (their highest point since April 2006), dipping to 70/7 in February. This behavior was based on smelters anticipating a market surplus in 2009 and a slight deficit in 2010, as noted in Section 5.3. This notion played a strong role in supply contract negotiations early in the year, leaving TC/RC charges at 75/7.5, over 70 percent above 2008 charges. Given a relatively lower available smelter capacity, TC/RC charges through the remainder of 2009 should remain relatively high. If the slight concentrate shortfall proves accurate, in 2010 TC/RC charges should moderate slightly but remain above the levels of 2009 and 2010, the years of the highest concentrate deficit (see Table 11).

…helping explain rises in spot and supply contract

TC/RC in late 2008 and early 2009, respectively.

0

20

40

60

80

100

120

140

160

180

Feb-06 Ago-06 Feb-07 Ago-07 Feb-08 Ago-08 Feb-09

Gráfico 3: Cargos de Tratamiento (TC)

Spot AbastecimientoFuente: CRU

US$/ton.US$/ton.



6. Other Relevant Metal Markets

6.1 Molybdenum and Steel

Molybdenum prices averaged US$8.9/lb. in Q1 2009, down 41.4 percent over the previous quarter. Q4 2008 prices –mainly November and December- fell strongly along with other commodities, then levelled off (albeit trending down) earlier this year.

After trading at US$9.33/lb. in January 2009, molybdenum fell 9.8 percent to US$8.42/lb. in March. Behind the drop were poor global economic prospects for 2009 and 2010, which led analysts to expect lower demand (see Section 2.1.).

Save for China, molybdenum market activity through Q4 2008 and Q1 2009 was scant. Falling prices, sharp drops in expected demand and packed inventories prompted consumer companies to step back and wait for prices to fall further, then cut production as global growth expectations continued to worsen.

Some analysts estimate marginal production costs for primary molybdenum mines to stand in the range of US$5-8/lb. If so, the downtrend should eventually give way to a period of relatively stable prices in the range of US$7-10/lb., somewhat below the estimates in our previous report.

The Global Steel Price Index averaged 141.34 points in Q1 2009, down 26.7 percent over the previous quarterly average.

As with copper and molybdenum, the financial crisis and its subsequent spread to commodity markets triggered strong losses in steel product prices, impacting the global growth outlook and attendant expectations for

Molybdenum prices stood at US$8.9/lb. in Q1

2009.

The Global Steel Price Index rose strongly in

2008, then collapsed at the end of the year.

Prices in 2009 are expected to average on

the order of US$7-10/lb.

100

150

200

250

300

350

mar-06 sep-06 mar-07 sep-07 mar-08 sep-08 mar-09

Gráfico 5: Índice Global de Precios del Acero

Fuente: CRU SPI

0

5

10

15

20

25

30

35

40

mar-06 sep-06 mar-07 sep-07 mar-08 sep-08 mar-09

Gráfico 4: Precio del Molibdeno

Fuente: Platts, MW Dealer Oxide.

US$/lb.



demand for steel and other commodities. However, in contrast to copper, lead and zinc, prices for steel and associated products, including molybdenum, show no signs of recovery. The losing trend has continued through Q1 2009 as China’s vast steelmaking capacity remains underutilized due to low domestic and international demand.

As reported by the World Steel Association (WSA, the former International Iron and Steel Institute), in 2008 world crude steel production dropped 1.2 percent from a year earlier, notably as the year drew to a close. The WSA also reports that apparent steel product demand shrank 1.4 percent in 2008 and expects demand in 2009 to contract an additional 15 percent, a clearly more pessimistic forecast than that posted two months ago. Medium- and long-term prospects remain upbeat, however, with prices expected to level off in H2 and recover somewhat in 2010.

6.2 Gold and Silver

In Q1 2009 the price of gold (London Initial) averaged US$907.61/oz., up 13.9 percent over the previous quarter and 2 percent below the Q1 2008 average. Prices closed the period 5.6 percent above the start of the year, in line with the moderate uptrend noted throughout the quarter (see Chart 6). In a quarter marked by volatility, prices fluctuated within 10 percent of the average, from a low of US$813/oz. in mid-January to a high of US$989.75/oz. on February 24.

A late-December rebound carried over into Q1, driven by rising interest in gold-backed exchange-traded funds (ETF). After closing 2008 at a record 1,200 tons, in Q1 ETFs increased their gold holdings by an additional 469 tons, vastly outperforming the 145-ton quarterly record set in Q3 2008.

Gold has benefitted greatly from an increased preference for gold-backed instruments and from its appeal as an inflation hedge. Gold also helps avoid loss of asset value in deflationary times and is a preferred portfolio diversification option.

In Q1 2009 the price of silver averaged US$12.6/oz. (London Spot), up 23.5 percent over the previous quarter but down 28.4 percent from a year earlier. While its prices closely track gold’s, with highs and lows taking place in unison, silver tends to fluctuate more widely. Prices ranged within 15 percent of the average, from a low of US$10.51/oz. to a high of US$14.39/oz.

Silver fundamentals have continued to erode as demand for industrial applications has plunged along with the global slowdown. While this is expected to continue in Q1, the crisis has spurred renewed interest in investing in silver, notably in bar form. Data through March shows that exchange-traded funds increased their silver holdings to nearly 2,000 tons.

The gold price average rose 13.9 percent over the

previous quarter…

The silver price average rose 23.5 percent over the

previous quarter…

…as the rise in silver-denominated assets made up for weak fundamentals.

…driven by rising interest in gold-backed assets.

However, the WSA

expects demand for steel to recover slightly

starting in 2010.



The gold/silver price ratio averaged 72x in Q1, down over the 80x high posted last quarter (see Chart 7). As this stands well above the long-term 57x ratio, over the medium term silver should rebound relative to gold.

40

45

50

55

60

65

70

75

80

85


Gráfico 7: Relación Oro-PlataNúmero de veces

Relación Oro-PlataFuente: LBMA

400

500

600

700

800

900

1,000

6

8

10

12

14

16

18

20

Mar-06 Sep-06Mar-07 Sep-07Mar-08 Sep-08Mar-09

Gráfico 6: Precio de Oro y PlataUS$/oz.

Plata (London spot) Oro (London initial)Fuente: LBMA

OroPlata



A Cochilco Research Department publication prepared by:

Paulina Ávila

&

Joaquín Jara

Market Analysis Coordinator

Juan Cristóbal Ciudad

Research Department Director

Ana Zúñiga

Published 13 May 2009

Documents

COPPER MARKET TRENDS REPORT - Cochilco · 618.7 kMT peak of February 25, the highest since March 2004. Deliveries to LME warehouses grew especially fast. The average daily delivery