Looking at parallels between looming supply shortages for copper and gold, and the likely different patterns the two metals will follow given copper is very much an industrial metal whereas gold largely revolves around financial and investment factors. But China is perhaps the single key element in both scenarios
I have just written an article for Mineweb covering a prediction that global copper supply is heading for a very large deficit – perhaps as much as 1.5 million tonnes by 2018. See: Copper heading for 1.5 million tonne deficit by 2018 . I have also penned an article on what I see as a looming gold supply deficit (indeed it may actually be with us already) on these pages (See: 2015 global gold supply deficit could be substantial).
There are some interesting parallels between the two articles with one particular factor standing out – notably Chinese demand. In terms of copper the current weak copper price is largely because there has been something of a hiatus in Chinese copper purchases in line with something of a downturn in the Chinese economic growth. Note this is not a recession in the economy, but a downturn in the levels of growth seen in the recent past. The Chinese economy still seems to be growing, but at a slower rate. The analyst bandwagon has seized on the slowdown as showing that the supercycle, primarily generated by Chinese demand for industrial metals of all kinds, has thus ended. The copper article stems from analysis by senior Bernstein analyst, Paul Gait, that in fact the Chinese generated supercycle is only around one-third into its course and the Asian dragon still has a huge amount of ground to make up on all other industrialised nations in terms of per capita metal consumption.
In turn the recent slowdown in Chinese economic growth has seen metal prices fall to production costs only now being just about covered by income from sales, whereas traditionally the copper mining sector operates on the basis of a 50% premium of sales to costs. As a consequence the big copper miners are cutting back heavily on costs, leading to a drastic fall in exploration expenditures, curtailment and cancellation of big new capital projects and expansions and some closures of now uneconomic existing mining operations to satisfy shareholder and institutional demands for profit maintenance, or at least recovery.
But, at the same time many of the major producing mines are seeing mill head grades running substantially above reserve grades which can only lead to declining output, without major plant expansions to counterbalance the trend. And finance for such major expansions is becoming more and more difficult to come by. With exploration curtailed, and nowadays huge lead times in taking a major new mine from discovery to production (figures of 30 years are being quoted) the world is facing a major copper shortage in the years ahead.
Gold is running into a very similar situation on the supply side. We may well have seen peak gold last year as low gold prices are already leading to new project cancellations and curtailments, closures of uneconomic operations and a big downturn in exploration expenditures. Coupled with older mines running out of ore and declining grades at other older operations it is beginning to look like this is the year global new mined gold production may be about to start to fall.
In other respects, though, gold and copper are on somewhat divergent paths. A big copper supply deficit is at least in part dependent on an uplift in global industrial demand and, in particular a recovery in Chinese imports. On gold though, we think the deficit is already in place and the reason it doesn’t show in analysts’ statistics is they totally ignore upwards of 1,000 tonnes of gold going into China, but not classified as ‘consumed’. The latest World Gold Council (WGC) Gold Demand Trends report, with figures from GFMS has a very tight figure for Chinese gold consumption (814 tonnes) which seems to bear little relation either to known imports of gold into mainland China, China’s own production and even less so to the huge Shanghai Gold Exchange withdrawals figures for 2014 which came in at over 2,100 tonnes. The WGC writes this difference off as mostly gold going into the Chinese banking system to be used in financial transactions and as collateral and thus not classified as ‘consumed’. I speculated that maybe this was Central Bank gold being hidden from the IMF by being held in the commercial banks (See: Is China hiding its central bank gold in its commercial banks?) China gold watcher Koos Jansen disagrees both with the WGC and with my speculative thoughts and he probably studies this market more than most – See(Koos Jansen vs WGC/GFMS/CPM Update).
But wherever this gold is actually going, it is physical gold and it is being removed from the market and if you add this into the WGC statistics one is starting to see a very large supply deficit if their other figures are correct – and a deficit which has probably been in place now for the past three years or more.
Unlike copper, however, gold is much more subject to potential financial manipulation through the futures markets and thus price trends are probably more difficult to predict, although logic does suggest that at some stage a real shortage of physical gold in the West will be seen and start to have a major positive impact on prices, but it is as yet uncertain when this break point will be reached timewise. With copper the inflection point will be reached when industrial consumers start running out of metal and that is a far more discernible factor as it can’t be hidden by enormous paper transactions (in relation to size of market) as can gold.
So China is very much the key to both markets, although India again is appearing to be a major player in future gold supply and demand. Latest figures out of the Shanghai Gold Exchange show another 59 tonnes withdrawn in week 6 making a total of 374 tonnes withdrawn this year already. This is substantially more than over the same period in 2013, or in 2014. Thus where is all this gold going – or perhaps more importantly where is it all coming from? It exceeds global new mined production on its own, and China alone only accounts for around half global gold demand. The figures just don’t seem to add up without their leading to some kind of price breaking point. But when?