Copper Sideways Year

Copper Sideways Year
April 12, 2010 | 09:40 GMT(+7)



Reporting: Abraham Lagaligo

Copper is a fortunate commodity, although the economic crisis has not over just yet. The demand for this particular industrial and construction material is utmost high. In 2010, the market would shift to Asia.
A round of applause filled the room when a Memorandum of Understanding between three local governments in West Nusa Tenggara and PT Newmont Nusa Tenggara (NNT) was signed. M. Zainul Majdi (Governor of West Nusa Tenggara Province) and Martiono Hadianto (President Director of PT NNT) both pleased with the agreement they have reached. The gold-copper miner has officially granted US$ 38 million of aid, marking the 10 years of production at Batu Hijau mine, on 1 March 2010.
Without any hesitation, Hadianto forecasted that compared to the previous year, this 2010, PT NNT share price will boost. The rise would be fueled by the improving gold and copper commodities price. Newmont has also prepared to offer the 7% divestiture of 2010 to the government of Republic of Indonesia, which will be completed by 31 March 2010 at the latest.
Hadianto’s statement was very reasonable. A few days earlier, there has been an earthquake of 8.8 Richter scale in Chile. The disaster has devastated the world’s largest copper mining infrastructures belong to Codelco. It has also caused the market to panic, in fear of losing supplies. Copper price subsequently move up by the end of February 2010, and reached US$7,590 per ton at the London Metal Exchange (LME).
The blessing in disguise has boosted copper price to rise up to 5.5% at the LME, and 5% at the Shanghai copper market at its opening. The Tokyo Stock Exchange booked 0.48% higher, with Mitsubishi Materials and Sumitomo Metal Mining lifted up 3.9% and 3.3% respectively. The stock exchange in Sydney also went 0.60% up, with Rio Tinto’s 1.15% climb. Similarly, the stock exchange in Shanghai and Singapore were experiencing the same elevated trend, of 0.33% and 0.32% respectively.

Sideways Demand
However, according to Pardomuan Sihombing, Assistant Director Research of PT Paramitra Alfa Sekuritas, the current copper price boost caused by the earthquake that hit Chile would only be a brief phenomenon. The panic would soon get over, and the market would stabilize. There is of course the risk that damages at Codelco’s mining infrastructure would affect copper production, but it wouldn’t take a very long time. “The production could be back to normal in a week or a month at the most.”
In 2010, Sihombing continued, commodity supplies at the global market would still be steady. Minerals, including copper, would also be stable with the tendency to grow. The increasing supply could be predicted because most of the mining companies have planned for expansion in 2010. “We can assume that supply would be increasing this year,” Sihombing told TAMBANG Magazine, on 2 March 2010.
The problem is that demand would be stagnant, with a tendency to decline, because until the third month of 2010 economic recovery in developed countries, in United States in particular, were at a very slow pace. Many of the economic recovery policies applied in those countries were ineffective. Consequently, the economic activities could not experience much progress, and the demand for commodities would be low.
“The indicators for global copper sales have shown the tendency to plummet. As a result, the price also got deprived,” he elaborated. However, he graphics of copper sales, as well as other minerals, has still shown fluctuations indeed. Therefore, we are expecting that economic recovery would fuel the demand to mount up, although the chances are odds that it could happen in 2010.
In the case of oil, the primary commodity for both the society and industry, the demand was still sluggish even with the cold winter that stroke Europe, when fuel was essentially needed for thermostat. Hence, for secondary or tertiary commodities, we could not expect a better condition. “So, in 2010 the copper price would have the tendency to be flat, slouching, or deprived,” he stated.
Conservatively, Sihombing predicted copper sideways price at approximately 20%. Nevertheless, if economic recovery could show a progress by the end of the first half of 2010, it could go down to 30% – 40%. Investors would still be pragmatic, and still reluctant to invest in manufacturing or infrastructure projects. They would prefer to move in the more easy come – easy go instruments in the stock exchange.
Sihombing estimated that economic recovery would start to show a significant progress by the end of 2012. By that time, copper price would be able to soar. In the meantime, economic recovery programs in most countries could not yet bring the energy back to the industry. One of the indicators was when Barrack Obama got defeated in several states during the US Election in 2009, although the Democrat had never lost votes on those states before. It proves that Obama’s programs were not favorable and needed to be altered. “It means that economic recovery would still be the agenda for quite a long time,” Sihombing added.

Market Shift to Asia
Similar points were also predicted by Norico Gaman, BNI Securities’ Head of Research. He forecasted that in 2010, copper would experience the same faith as other metal commodities, which heavily rely on global economic recovery. Nevertheless, copper has the advantage of being the most consumable mineral commodities, compared to others, because it can be used in construction as well as manufacturing industry.
“Currently, copper price has started to slowly climb up. However, it has more advantages compared to tin and nickel,” Gaman told TAMBANG Magazine on 1 March 2010. With its advantages, copper is an indicator of global economic growth, along with iron that came in second as the most consumable metal. When both the price and demand improving consistently, it would mean that the global economic growth has been on the right track.
There are not many copper producers in Indonesia, with PT NNT and PT Freeport Indonesia (PTFI) as two of the largest producers. According to Sihombing, there are not that many copper producer because local demands are relatively small. Almost 100% of Indonesian copper has been exported in a raw form. As long as the domestic manufacturing industry stays underdeveloped, copper would totally depend on the export market. “When the global economic faces problems, our copper price would surely be in trouble,” he explained.
In 2010, PTFI has set a target for 1.2 billion lbs of copper production, or 0.2 billion lbs less than last year’s production. This year, PTFI will mine lower grades ore at Grasberg open pit mine in Papua. According to geological condition of PTFI’s mining area, there are parts which produce copper with various grades. To optimize the performance, concerning quality and operational safety, mining process has to be consistently conducted as the designed sequences.
PT Newmont Nusa Tenggara (NNT) has also estimated that its copper production would continue to be reduced until 2012. According to Martiono Hadianto, the shrinking production has to do with the commencement of Batu Hijau mining site extension to Phase 6 and 7. The clearance for Tatar Sepang National Park area, in Sumbawa Regency – West Nusa Tenggara, was earned last October. Because of that licensing issue, the strategic reserves could not be mined soon enough to achieve expected production target.
Meanwhile, in 2009, PT NNT has produced 479 million lbs of copper. The production targets are set at 572,284 ounces in 2010; 265,124 ounces in 2011; and 196,669 ounces in 2012. It was expected that in 2013, production could speed up with normalized strategic reserves to be mined. Last year, PT NNT has also paid its US$11.3 million of copper royalty obligation to the government.
Bambang Setiawan, Director General for Mineral, Coal, and Geothermal – Department of Energy and Mineral Resources, also said that this year Indonesia’s copper production would be stable, but it would sharply decline by 36% in 2011 and 2012. According to the director general, the production would bounce back by 47% in 2013. “Currently, most of our copper productions are exported,” Setiawan explained earlier this year.
According to Norico Gaman, the traditional buyers of Indonesian copper are including United States, Japan, South Korea, and Taiwan. Currently, the economic recovery in the US has been going at a slow pace, so copper sales has been more focused to Asian market.
“We can observe the prospect to sell copper to India and Vietnam, because those countries have shown increasing copper consumption,” he said. The two countries has been vastly developing construction business because of their needs for infrastructures. The fact has leaded the shift of copper market, from its traditional market of industrialized countries to the new market of developing countries with blossoming economy.
China might also be considered as an interesting market for copper, but the country has its own production capacity. Chinese copper imports have only been supplementary for its huge demand. Meanwhile, Vietnam and India, as well as Japan and Thailand, have no copper resources of their own, to compensate their vast industrial and infrastructure development.
Gaman further explained that with the current market condition, the ideal copper price is in the range of US$ 8,000 – 9,000 per ton. Nevertheless, by early March 2010, copper price could only sit at US$ 7,195 per ton. The price had jumped a little, in February 2010 after the earthquake hit Chile, to reach US$ 7,590 per ton. However, it was only a brief phenomenon, and the copper price chart has returned to sideways.

Enforcing Added Value Regulation
The Ministry of Energy and Mineral Resources has reported that Indonesia’s copper resources potential is at 68,960,881 tons, with 33,863,496 tons of reserves. The number would continue to grow, along with the explorations conducted by the government and the existed mining companies.
Indonesia has the Grasberg copper mine, managed by PTFI in Papua, the second largest copper mine after the Chuquicamata mine in Chile. Behind Chile and the United States, Indonesia is the third largest copper producer. Unfortunately, Gaman complained, the high demand for Indonesian copper is because we only produce raw copper, so it could be bought at a cheaper price. Buyer countries, who have their own processing factories, could resell the end products at a tripled price.
Therefore, he expected, PTFI and PT NNT should end their copper concentrate exports, step by step. The Law No 4/2009 on Mineral and Coal Mining (Minerba Law) has stipulated for domestic smelting and processing. The Governmental Regulation (PP in its Indonesian abbreviation) No. 23/2010 on Mineral and Coal Mining Business Activities has also regulated that metal products are to be exported after processed.
Nevertheless, the implementation of smelting/processing policy has not been able to accomplished, because PTFI and PT NNT have both still bound to long term contracts of raw copper export. Gaman also indicated that there have been copper “robberies” by Freeport and Newmont. “Both foreign companies have exploited copper from Indonesia to the greatest extent, and have sold it abroad in its raw form,” he exclaimed.
25% of PTFI’s copper production, as well as PT NNT’s, has been processed by PT Smelting Gresik to form copper cathode (wiring material), indeed. Nevertheless, the number is way too small compared to the yearly exported raw copper. All foreign investors should have obeyed the regulations that applied in Indonesia’s jurisdiction. With Freeport and Newmont already owning their own copper smelter at their home country, “they have to be pushed to relocate their smelters to Indonesia,” Gaman asserted