Copper Final

COPPER: THE RED GOLD NOVEMBER 2007

Copper

is a reddish-coloured metal and is one of the few metals to naturally occur as an uncompounded mineral. Copper was known to some of the oldest civilizations on record, and has a history of use that is at least 10,000 years old. Copper is produced in a number of countries all around the globe. In modern times, Copper supply arises from two sources-majority, i.e 88% comes from primary production-fresh copper that is mined from below the earth. Secondary production i.e recycling of the copper scrap constitutes the rest of supply (12%). Being a malleable metal, it can be hammered and moulded into different shapes. Again, since it is ductile, it can be drawn into wires. The metal is also a very good thermal and electrical conductor; second only to silver at room temperature. All these physical properties make this metal ideal for use in a number of fields like Architecture, Automotive, Electrical, Building Wire, Energy Efficiency, Power Quality, Tube, Pipe & Fittings, Fuel Gas, Industrial, Seawater, Machine products, Telecommunication, Copper Compounds etc. Building construction is the single largest market, followed by electronics and electronic products, transportation, industrial machinery, and consumer and general products. Residential construction is about two-thirds of the building construction market. An average single-family home uses 440 pounds of

copper. Copper is the material of choice for plumbing, taps, valves and fittings in homes. Electrical uses of copper, includes power transmission and generation, building wiring, telecommunication, and electrical and electronic products. All major forms of modern transportation depend on copper to perform critical functions. There's more than 50 pounds of copper in a typical U.S.-built automobile: about 40 pounds for electrical and about 10 pounds for nonelectrical components. Today's luxury cars, on average, contain some 1,500 copper wires totaling about one mile in length.

The sector wise breakup of uses of copper is listed below.

However there are wide geographical variations when it comes to uses of this red metal.

COPPER: SUPPLY DYNAMICS

In 2005, Chile was the top mine producer (production from primary sources) of copper with more than one third world share followed by United States, Indonesia and Peru.

When it comes to production of refined copper (both from primary and secondary sources), Chile once again leads the pack followed by China, Japan and United States.

World copper mine production in 2007 is projected to rise by 5.1% to 15.79 million tonnes (Mt), an increase of about 770,000 t compared with that in 2006. Production in 2006 was essentially unchanged from that in 2005 owing to production problems in Chile, Indonesia, and Mexico. Mine Production in 2008 is expected to increase by 1.2 Mt (+7.6%) to 17.0 Mt, owing to new mine developments and increased capacity utilization. World production of refined copper (adjusted for both feed shortages and production disruptions) is projected to reach 18.12 Mt in 2007, an increase of about 765,000 t (+4.4%) compared with that of 2006. Production increments will arise from a number of smaller scale projects in Zambia, Peru and the United States. World production of refined copper (adjusted for both feed shortages and production disruptions) is projected to reach 18.12 Mt in 2007, an increase of about 765,000 t (+4.4%) compared with that of 2006. Refined production in 2008 is projected to increase by 4.6% to 18.95 Mt, an increase of about 830,000 t compared with that of 2007. Electrolytic refinery production increases in China, India and Japan, and SX-EW production growth in Chile, Africa and the United States are expected to account for most of the growth. Copper prices have been underpinned in recent years by unexpected production losses due to technical woes, accidents and strikes, keeping supply tight and deferring a predicted move into sizeable surplus.

COPPER: DEMAND AND CONSUMPTION DYNAMICS As world population continues to expand, demand for copper tends to increase as well, while remaining sensitive to variances in economic cycles, changes in technology, and competition between materials for use in applications.

The intensity of use for a material relates the demand (consumption) of that material to economic activity (gross domestic product, or GDP). More developed regions of the world benefit from a well-established infrastructure, to which copper is an important contributor. As developing regions expand their infrastructure, copper and other materials will form the building blocks needed to increase living standards.

As seen from the graph, China the fastest growing economy with a GDP growth of more than 11% has shown a consistent and fastest demand growth (per capita) for the red metal over the years. India, the second fastest growing economy, comes a close second. Nevertheless, the intensity of copper use in China, while increasing, is still low in comparison with that in other developed Asian countries, such as Japan and the Republic of Korea. This indicates that there is considerable potential for continued strong growth in China’s copper demand over the medium term.

China, with its huge appetite for the red metal remains the key driver of the demand for copper. The fastest growing economy, which is also the host of 2008 Olympic Games, is witnessing rapid urbanization and industrialization at massive scale. In 2006, the country used about 22% of the world's supply, up from 10% a decade ago, according to industry estimates. China overtook United States as the leading consumer of the metal in 2002.

World refined copper usage increased by only 2.3 % in 2006 to 17.12 Mt, constrained by a decline in U.S. and Chinese usage of around 6% and 1%, respectively. The main contributors to 2006 growth were the European Union (EU), Japan, India and the Russian Federation. In 2007, refined copper usage is projected at 18.0 Mt, an increase of about 890,000 t (5.2%) compared with that of 2006. Strong growth in apparent refined usage in China is expected along with continued growth in India and Russia, while usage is expected to decrease in the EU, Japan, and the United States. World copper use in 2008 is projected to grow by 3.8%, or about 690,000 t, to 18.70 Mt. According to ICSG data, after ending 2005 with a deficit of 120,000 tonnes, the copper market in 2006 turned to a calculated surplus of around 330,000 tonnes. Projections for 2007 indicate a small surplus of around 110,000 t (0.6% of usage), and projections for 2008 indicate a larger surplus of around 250,000 t. (1.3% of usage). For 2009, the expected growth in production is expected surpass the growth in usage and a larger market surplus is anticipated. The chart below depicts the International Copper Study Group’s (ICSG) monthly estimates of global copper supply and demand since 1994.

China's refined copper imports, the world's largest, slowed in October from this year's record pace and will probably decline in 2008 as domestic smelters ramp up production, underscoring concerns about a global surplus. According to the Beijing- based customs office refined copper and alloy imports fell 4.6 percent in October to 103,080 metric tons, compared with September. Net imports next year may drop to 1.1 million tons from this year's 1.3 million tons, according to the median estimate in a Bloomberg survey of five analysts. This easing off of Chinese demand is mainly seen as fallout of tight monetary policy and investment/liquidity curbs measure introduced by Chinese central bank and government bank in response to high inflation and food prices. The central bank has raised interest rates five times this year in order to counter a high inflation, which currently rules in the range of 6-6.5% and prevent economy from being overheated. Lower Chinese imports may weigh on prices as the fastest- growing major economy accounted for almost all copper demand growth this year, according to the International Copper Study Group. In recent times, US demand for copper has been particularly hit hard by losses arising from subprime fiasco in 2007. The crisis in financial markets extended to US housing market indicating a slump in US housing sector in particular and a recession in economy in general. The metal used primarily in wires,

pipes, plumbing, heating and air-conditioning is used extensively in US housing market. The current US housing slump is being seen as worst in 16 years. Moreover, The price of the red metal usually moves in line with economic growth and has thus been hammered down by the talks of recession in US economy as disappointing employment figures, building permits, retail sales data etc. are released. The US Federal Reserve too has slashed its outlook for next year's US economic growth owing to rising oil prices and the US housing crisis. According to the International Copper Study Group, Copper consumption in the US dropped 2.4 percent in the eight months ended Aug. 31. Copper has lost around 20 percent since mid-August when the fears relating to US credit crunch were first raised.

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In recent months, copper has been closely following wider financial markets for signs of future demand. Sustained weakness in financial markets is likely to soften metals demand as liquidity dries up. Throughout the credit crunch and resulting volatility, copper has tracked the equities better than any other investment vehicle. This chart illustrates this fact using the most current copper contract and the Dow Jones Industrial Average.

Rising copper stocks, as seen by a daily LME report, have also battered down the red metal's value as not only is the data a sign of ample inventory, it is evidence that demand is weaker than expected. global copper inventories tracked by the London Metal Exchange have risen by around 40% since mid-September, when subprime woes heavily weighed on the metals market.

Still, world copper inventories remain extremely low by historical standards, and would provide little cushion in the event of a major supply interruption.

On the flipside, a weaker dollar is often seen as supporting the copper prices, as a slide in the dollar makes the metal cheaper for buyers holding other currencies. Frequent strikes in Latin American countries of Chile, Mexico and Peru, the leading mine producers of the red metal, labour shortages, equipment shortages and mine accidents etc. are also limiting any significant downside in copper.

OUTLOOK SUMMARY ü Chinese demand remains a vital link in copper story. Reaccelaration in Chinese demand growth has the potential to offset weaker US demand. Rising standard of living and country’s voracious appetite for metal remains the key driver of metal price. Any ease in demand seems only a temporary phenomena, fuelled primarily by a tighter monetary policy of Chinese Central Bank. A weaker dollar only encourages Chinese buyer as they buy copper priced in dollar terms from the international markets. One downside risk to Chinese demand is that remains is, Chinese economy being an export driven one, any sizeable slowdown in American or European economy will inevitably slow Chinese demand. ü US demand is expected to regain its normal pace once the economy recovers from the shocks arising from subprime fiasco and the subsequent credit crunch. Fed’s aggressive move to cut interest rates is expected to curb the credit woes from affecting the larger US economy.

The G.D.P data released by Bureau of Economic Analysis point to a resilient US economy, though Housing Sales and Jobless Claims figures still remain a concern. ü Demand growth coming from European countries and Emerging Markets like India; Russia etc. too may continue to support copper prices. ü Latin American mining problems at regular intervals are expected to have potential impact on the production and thus may provide significant upside in copper prices. In fact, Frequency of labour unrest tend to increase during bull market in metals as miners ü Sustained weakness in dollar is expected to boost prices in entire commodity space, including copper. ü As the world’s population grows and economic development continues, the consumption of copper can be expected to increase as annual per capita consumption for products such as electrical power, automobiles, plumbing supplies, telecommunications devices and air conditioners increases. ü Prices are expected to bottom out from lower levels and are expected to recover to healthy levels for next one year or so after which some softening is expected due to fresh supply from mines hitting the market. Seen over a longer period of time, global copper prices are projected to ease as world refined copper production exceeds consumption and stocks rise further. However, a lack of large-scale projects is expected to keep stocks growth low and limit falls in prices. By 2012, copper prices in real terms (in 2007 dollars) are projected to be less than half the exceptionally high average price achieved in 2006. ü A possible recession in the US remains the single biggest downside threat to copper prices.

COPPER: VITAL STATISTICS

*Source: INTERNATIONAL COPPER STUDY GROUP (PORTUGAL)

*Source: KATE PENNY, Abareconomics (Australia)

SOURCES: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

ICSG.ORG (INTERNATIONAL COPPER STUDY GROUP, PORTUGAL) WIKIPEDIA.COM BLOOMBERG.COM REUTERS.COM BASEMETALS.COM ABARECONOMICS.COM AGEDWARDS.COM CPMGROUP.COM (NEW YORK, US) BROOKHUNT.COM REUTERS DATABASE BRITISH GEOLOGICAL SURVEY KITCOMETALS.COM

Disclaimer: This research report is NOT in the nature of recommendations to buy/sell securities or commodities by the Mansukh Research Team. Following these recommendations is solely the responsibility of the trader. Mansukh Commodity Futures Pvt Ltd. is neither responsible nor liable towards the outcome of these recommendations.

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