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Global growth causes markets to see red

>By Kevin Morrison >Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 The meteoric rise in copper prices this year has prompted fears of a bubble in the market, but strong global economic growth has stimulated demand and tight supplies have led to fears of shortages particularly in China. It is a situation that, some believe, justifies the prevailing elevated prices. The rise may be welcomed by miners and investors, who have received bumper profits as a result, but copper fabricators are complaining of a squeeze on margins due to higher raw material costs, which they are unable fully to pass on to the consumer. The 75 per cent-plus rise in prices, to more than $7,700 a tonne at the end of last week, has attracted the attention of investors, from hedge funds to long-term focused pension fund managers, as well as commodity index fund managers. The rush of investment money into the market, which has not been immune to price manipulation in the past, is partly motivated by portfolio diversification and the seeking of superior returns. The flow of funds into the market is not idle speculation as the metal has one of the tightest supply conditions in any of the commodity markets. Following three years of demand outstripping supply, global inventories have fallen to critically low levels of under four weeks of global demand. The International Wrought Copper Council says the higher cost of the metal has added credit risk to its members, who are fabricators. Copper producers need fabricators to bring their metal to the final user but, increasingly, companies providing that service are being threatened by the copper price and payment terms common in this industry, says Thierry Centner, IWCC chairman. Peter Kettle, copper analyst at CRU, the metals consultancy, says current market conditions are a result of the miners being ill-prepared for Chinas rapid industrialisation after more than two decades of weak prices, flagging demand and poor mine investment levels. China accounts for 22 per cent of global copper demand, making it the worlds largest user of the metal, yet it mines only about 5 per cent of global output. Mr Kettle says this has led to bottlenecks all along the global supply chain with mines operating at full capacity and miners complaining about shortages in mining equipment from tyres to earthmoving equipment and even in human resources, from geologists to engineers.

He says Chinas demand boom, which has swelled imports of copper by almost 70 per cent in the five years to 2005, has accelerated global demand growth to an average of more than 4 per cent, compared with a long-term average of about 3.5 per cent. Supply has also been constrained by some of the larger miners being very conservative about their long term pricing for copper, says Mr Kettle. Most copper miners base investment decisions on a long-term planning price of 80 to 90 cents a pound. However, the price has quadrupled in the past four years to more than $3 a pound. There seems to be an acceptance that we are going to have higher oil prices for longer, as the days of $20 oil appear to be over. I think there needs to be the same debate over metal prices, Charlie Sartain, chief executive of Xstrata Copper, told a conference in Santiago last month. Mr Sartain said commodity price inflation was partly due to increased production costs. He said that although production costs in inflation- adjusted terms had almost halved in the past 100 years, mine-site costs for copper mines had recorded a cumulative increase of almost 50 per cent between 2002 and 2005, while the average head grade of copper in the ore had fallen a cumulative 5 per cent over the same period. This meant there was less copper in each tonne of ore thereby requiring more ore to get the same amount of copper. Energy costs had risen more than 46 per cent in the four years to 2005. Miners also face the increased cost of converting open-pit mines, which are cheaper to operate, into underground mines as they tap deeper into the deposits. Grasberg, one of the worlds largest copper mines, will produce more of its output from underground sources. The higher operating costs have nevertheless been more than offset by increased copper prices. These have given producers a profit windfall that has boosted shareholder dividends but reinvestment into the underlying business through higher exploration and development expenditure has not kept pace. Nevertheless, this conservative approach by senior management in the mining industry may be welcomed by equity investors, as in previous booms miners have responded braised output just as demand started to decline. Miners, however, also face a tougher time trying to find large deposits. The last price booms in the late 1980s and the mid-1990s were met by rising output in Chile when the South American nation was opening its doors to foreign investment as it turned to civilian democratic rule after almost two decades of military dictatorship. (The second of these booms was halted following the unravelling of the Sumitomo copper scandal.)

Chiles production is about 5.5m tonnes a year, up from about 1.5m tonnes in 1990 and doubling its share of world supply to 36 per cent over the 16-year period. However, Chiles output fell slightly last year, prompting fears that the country, which has the worlds largest reserves, is running close to peak production. In Chile, there is concern that prospects for further expansion are limited in part by a shortage of water and adequate energy supplies particularly in the Atacama desert in northern Chile, where about 3m tonnes or just under one-fifth of global supply is produced each year. The owners of the Collahuasi mine in northern Chile, Anglo American, Falconbridge of Canada and Mitsui of Japan, were told by the local environmental authority that they had to cut the amount of water they were using. This was because their heavy usage was threatening to dry up the nearby lagoon within one-third of the time that the mine operator said it would. The warning jeopardises the companys expansion plans. If demand were to continue at its current growth rate, consumption would double from its current level to about 30m tonnes by about 2025, says Mr Kettle at CRU. Tom Albanese, executive director of copper and exploration at Rio Tinto, told the Santiago conference that Rio and BHP Billion invested $200m in a desalination plant at Escondida, the worlds largest copper mine, which together they control. The aim is to pump seawater a distance of 200km with a rise of 3,000m to satisfy the mines needs. Multiply Escondidas new water requirements with all the mines in northern Chile, and the dimension of the problem becomes apparent. Any new projects effectively face a doubling of the cost of processing their ores over costs they might have historically envisaged if the only source of water is the sea, Mr Albanese said. Miners also have to look further afield for new projects. Two of the biggest untapped deposits are the Oyu Tolgoi Project in Mongolias remote Gobi region, which is being developed by Ivanhoe Mines,a company controlled by Robert Friedland, the mining entrepreneur The other is and Tenke Fungurume, a copper-cobalt deposit that was first explored almost 90 years ago in the Democratic Republic of Congo. The project is currently controlled by Phelps Dodge. Both projects have been hit by delays. Mr Albanese said that, in spite of the increased challenges facing miners, the world is not running out of copper. He said Rio Tintos database of mines and projects showed 300m tonnes of reserves at existing operations, another 200m tonnes in resources at existing operations and a further 500m tonnes at exploration prospects. That is a sizeable inventory compared with current usage of about 15m tonnes a year.

China: Feeding a growing appetite By Geoff Dyer in Shanghai Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 Just as it has with so many other raw materials, China has begun to exert an enormous influence on the global market. The country has always been a big consumer, but in recent years its appetite for the metal has grown exponentially one of the main reasons for the surge in prices over the last three years. In 1995, Chinese consumption of refined copper was 1.19m tonnes: by 2005, it had more than trebled to 3.61m tonnes. From less than 10 per cent of world demand a decade ago, it now accounts for 22 per cent. In 2003, it passed the US to become the worlds largest consumer and by 2004 it was consuming 46 per cent more than the US and nearly three times as much as the next country, Japan. The double-digit annual surge in demand has come from three main sources construction, power generation and the electricity network. The biggest driver of consumption has been the expansion of the electricity transmission and distribution network, a highly copper-intensive system that received investment last year of $13bn. The fact that Chinese cities have been undergoing a massive construction boom is well known. But even within this trend, demand has been surprisingly strong as many cities have established building codes that require the use of more copper wiring to accommodate the growing use of appliances such as air conditioners. The other driving force has been the expansion of power generation. China is expected to build around 60,000MW of new generation capacity each year until 2008 which means adding more than Spains entire energy system every year. Even this rapid rate of growth has not prevented constant power shortages in industrial areas. But with most of the transformers and generating equipment made locally, the investment has led to ever-rising copper demand. Such new-found prominence in the market has even brought China a trading scandal. A Chinese government trader was reported to have taken out positions on the London Metals Exchange last year that could have led to tens of millions of dollars of losses.

Given such a dramatic shift in consumption over the last decade and the continuing rise in international prices, the obvious question being asked is whether such demand growth can continue. Such questions have been brought into sharper focus by the recent rise in Chinese interest rates, a signal that the government wishes to cool economic growth. The 0.27 per cent rise in itself will have little impact on the economy but some economists believe that the rate hike could be the precursor to a new round of administrative measures the government-imposed restrictions on new credit that China used in 2004 to try to slow the economy. If such a round of new measures is unveiled, much of the impact will be directed towards the construction sector, which has been growing more rapidly in recent months than analysts had expected. High copper prices are also having some impact on end-users. Anecdotal evidence suggests that many smaller producers of consumer goods such as air-conditioners which use copper wiring have closed over the last year because they have been unable to pass on higher raw materials costs to consumers. As a result, Jin Shan, an analyst at Star Futures in Shenzhen, says the growth rate for demand is likely to slow to 8 per cent a year. The decrease of growth rate is mainly caused by high copper prices, he says. The slowing demand growth is mainly because companies at the lower end of the production chain cannot bear the rising prices, while some copper users have shifted to aluminium. There are also some predictions that the surge in energy investment will slow sharply because of overcapacity. Zhuang Weidong, an analyst at Shihua Financial in Shanghai, says the increase in demand will start to slow because the rapid phase of increasing power production capacity is reaching an end. Copper used for power stations buildings may not increase as much as previous years, he says. However, on the prospects for the construction sector, he adds: Do not forget that the urbanisation of the Chinese countryside is just getting started. Yet many economists believe that fears of a sharp slowdown in Chinese demand for commodities are being exaggerated. The government is really focused on preventing further growth upside, rather than trying to bring down momentum sharply, says Jonathan Anderson at UBS in Hong Kong. Liu Youcheng, an analyst from Holly Futures, a local brokerage, points out that most Chinese consumers have few other alternatives. Demand is rigid because of the difficulty in finding substitutes for copper, he says. Yet even if Chinese demand remains strong, there could be a change in its structure. China is investing heavily in smelting capacity. Jim Lennon, commodities analyst at Macquarie in London, says that up to 3m tonnes a year of smelting capacity could be

added in the next five years. As a result, Chinese imports will shift more to concentrates and scrap, rather than refined metal. Refining: China develops capacity to gain top spot By Kevin Morrison Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 The expansion of Chinas copper refining capacity by more than 70 per cent over the past five years, along with plans for large capacity increases in the future, are set to see China replace Chile as the worlds biggest producer of refined metal within the next year. The growth of Chinas ability to turn copper from its raw form into a metal for pipes, wires and electrical components is set to change the dynamics of the market. It could also see Chinese smelters and refiners exert more bargaining power in the annual negotiations over supplies to smelters. China has already tried to use its muscle in other commodities markets. In March, the government threatened to intervene in the negotiations between its steel mills and iron ore producers in Australia and Brazil to avoid further price increases in iron ore prices. Christine Melton, an analyst at CRU, a metals consultancy, says that even though China is the worlds biggest importer of concentrate, neighbouring Japan sets the treatment and refining charges for smelters and refineries. It is not something that is going to happen overnight, but eventually you will see the Chinese exert their muscle when it comes to negotiating treatment charges, and that is likely to result in a better rate for their smelters, says Ms Melton. China has added more than 1m tonnes a year of refinery capacity since 2001 and produced 2.58m tonnes of refined metal last year, just behind Chile, the worlds largest producer of mined and refined copper. Chinese refiners Yunnan Copper and Jiangxi Copper are looking to add 700,000 tonnes of capacity between them by the end of the decade. China will have to look to import more concentrate, Wang Chiwei, an executive director at Jiangxi Copper, told a conference in Santiago, Chile last month. In March, Chinas Minmetals, the state-owned metals trader, and Codelco, Chiles largest mine producer, signed a 15-year supply agreement under which Minmetals would supply more than 800,000 tonnes of concentrate.

Although the deal locks in long-term revenue for Codelco, it signals that Chile will increasingly become a provider of concentrate, rather than the more value-added refined version. It is a problem for us, says one Codelco executive. Chile produced 2.82m tonnes of refined copper last year, a level that has remained almost static for the past five years. The country has not built a new smelting and refining complex for about 40 years, although it has modernised and upgraded its plants to keep pace with the expansion in mine production. Chilean mines produced about 5.5m tonnes of concentrate last year, up more than 16 per cent since 2001, according to data from the International Copper Study Group (ICSG). State-owned Codelco, which is also Chiles largest refiner, produced about 1.7m tonnes of refined metal last year. Plans to expand Codelcos refining capacity by 1.13m tonnes at a project near the Mejillones port in northern Chile have been shelved, partly because of costs as smelters and refineries require large amounts of energy. The process of converting concentrate, which is a sand-like substance, to copper cathode relies on processing at extremely high temperatures to keep it in its liquid state. With northern Chile relying on gas imports from neighbouring Argentina, the cost of operating a smelting and refining complex is estimated to be a lot higher than it would be for an equivalent plant in China and India. Ingrid Sternby, base metals analyst at Barclays Capital, says the growth of refining and smelting capacity in China and India reflects the growth in usage in Asia. The region consumed 7.90m tonnes of refined copper last year, up 31 per cent from 2001, with China accounting for almost half of this usage. Over the same period refined usage in the Americas has fallen 10 per cent to 3.5m tonnes with most of the fall occurring in the US and in Europe usage has remained relatively flat at 4.7m, according to the ICSG. Nevertheless, smelter and refining operators in Europe and North America remain nervous about Chinas growing dominance in the refined copper market. John Schonenberger, chief executive at the European Copper Institute, says European smelters face higher charges as energy, staffing costs and environmental compliance charges were higher. He says that, in Germany, energy charges have risen more than 50 per cent in the past 18 months, and it has been very difficult not to pass on those energy costs.

Mr Schonenberger adds that, although Europe is a higher cost producer, it is important for it to maintain smelting and refining capacity, as about 40 per cent of European consumption last year was supplied from recycled metal. Trading: A high-profile and speculative metal By Stephen Schurr in New York Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 When the conversation turned to commodities at Berkshire Hathaways Woodstockian shareholder conference in Omaha, Nebraska this weekend, Warren Buffett commented that something like copper is speculative on both sides of the market - you are looking at a market thats responding more to speculative than fundamental forces. With all due respect, the Sage of Omaha may not know the half of it. The price of copper has quadrupled since 2002, including a 75 per cent rise this year to $7,780 on Friday, making fortunes for the hedge funds and commodity traders such as US hedge fund Touradji Capital and Red Kite Management who got in early and crushing a handful a traders who made bearish bets too early. The rally in copper has been driven the past few years by a razor-thin supplydemand balance that toppled every time there was a disruption at a copper producer. However, in 2006, the stunning ascent of the base metal has unnerved the most bullish copper investors. The primary drivers of the latest surge seem to have come unmoored from the fundamentals. There are quantitative hedge funds such as Man Groups AHL and Winton Capital as well as trend following funds drawn to copper, and they are pushing the price of copper higher. There are hordes of institutional and individual investors piling into commodity assets - Barclays Capital said investments in commodity index funds would surge 38 per cent to $110bn in 2006 - and they are pushing the price higher. There are hedge funds such as Ospraie Management and traders such as Chinas State Reserve Bureau that, according to market participants, have given up the ghost on their short bets and opted to cover at sizable losses, and they had pushed the price higher. Large investment banks have been asked to exit copper producers long-term short positions but have not been able to find the liquidity to do so, and they have been forced to hedge the short positions by buying copper, pushing up its price in the process. As all of these market factors slow down, copper may be due for a sharp correction that could cut the price by as much as 50 per cent, according to some market participants.

Meanwhile, a handful of copper watchers are raising the question whether the copper market has been manipulated by one or a few investors. Copper is a fairly illiquid market, and one that is relatively easy to corner, even if it proves difficult to exit the corner ultimately. The crux of the speculation is this: One or a few investors bought up some copper a few years ago when the metal was not in short supply and the price stood at $2,500. The theory goes that a few hedge funds have purchased copper inventories and kept them hidden from the market, making a fundamentally tight market for copper even tighter, albeit artificially. Market participants speculate that these funds have removed physical copper from warehouses at certain times to enhance the perception that inventories are going lower. If anyone is manipulating the statistics to manipulate the market price of copper, thats market manipulation, says David Threlkeld of Arizona metals research firm Resolved. Mr Threlkeld has some history in sniffing out problems in the copper market, having blown the whistle on the Sumitomo copper scandal in the 1990s when trader Yasui Hamanaka hid $2.6bn in losses after previously cornering the market for physical copper. Some copper investors downplay the speculation about manipulation, saying the driving force behind the stunning rally has been simple supply-demand constraints, coupled with disruptions such as the recent strike at a Mexican copper mine that produces 250,000 tonnes a year. Even if there are some investors who hold physical copper supplies and have kept them off the market, copper as a hotbed of market manipulation does not make sense when other base metals markets such as zinc have seen similar meteoric price moves. There is nothing special about copper, except that it has been singled out in the press - its simply at the forefront of what is happening in the commodities, says one copper market participant. Others, however, agree that some additional manipulation may be occurring, or may have occurred. Indeed, one individual familiar with the copper producers says they are considering launching an investigation into allegations of market manipulation. There is a heated amount of speculation in copper right now, the question is whether this is purely speculation or is someone playing games? We dont know yet, says Jack Rabinowitz, a London-based attorney with Teacher Stern Selby familiar with trading rules. Even without any market manipulation, several copper watchers say a swift and substantial correction may be in the offing for copper that could cut the price in half over a few weeks.

Power market: Industrialisation fuels demand By Kevin Morrison Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 Chinas rush to industrialisation is best illustrated by the massive expansion of its power network, where it is expected to add almost as much capacity this year as the entire UK power system. Such a large scale construction project requires a large amount of copper and accounts for up to half of Chinas annual total consumption, which in turn accounted for 22 per cent of global usage of 16.46m tonnes last year. This makes the power sector by far the biggest driver of Chinese consumption growth, and the worlds single largest consuming segment of the metal, accounting for about 11 per cent of global demand. Wan Ling, an analyst at Beijjng Antaike Information Development, a metals information service, told a conference in New York last month that China added power generation capacity of 67,710MW last year, with a further 70,000MW of capacity expected this year. This compares with the entire UK power network of 80,000MW, and is the biggest expansion of any power network anywhere in the world in a single year. This rate of increase is more than double the annual capacity additions in the early 2000s which were still bigger than adding the entire size of the Belgian electricity grid as China raised its investment in its electric generation network. Power shortages in 2004 threatened to curb the countrys blistering economic growth rates. With more than 400m people still without electricity, China is undertaking large urbanisation projects to connect more Chinese to the network. The power grid is central to Chinas economic growth as it has invested heavily in power intensive industries such as steel making, aluminium and copper smelting, along with manufacturing activities from car making to electrical appliances. Bonnie Liu, metals analyst for Macquarie Bank, says the Chinese power sector will maintain its strong position in the next five years given Chinas 11th five-year plan of urbanisation, with associated investment of Rmb900bn into power grid and transmission. Ms Ling from Beijing Antaike said that Chinese power generation capacity should reach between 723,000MW and 753,000MW by 2010, representing an annual growth rate of up to 8.1 per cent from 2006 to 2010. As a consequence copper consumption in the Chinese power sector should reach 2.6m tonnes in 2010.

If China does reach this amount of power capacity it would mark a sharp acceleration in the power grid. It took until 1987 for China to reach the 100,000MW generation capacity level, 200,000MW in March 1995, 300,000MW in April 2000, 400,000MW in May 2004, and 500,000MW in September 2005. Copper consumption in the (Chinese) power sector is expected to continue to grow strongly over the next five years, but after then we should start to see consumption growth start to slow, says Jon Barnes, principal consultant for copper fabricating at CRU. Copper is an efficient conductor of electricity and it is used for power distribution cables that are often laid underground, as well as in transformers, which are used to transport electricity to the home, office and factory. Transformers are designed to raise or lower the voltage to meet specific electrical needs. High prices are unlikely to stimulate substitution of the metal as there are few alternatives that are as effective at conveying electricity. Peter Kettle, base metals analyst at CRU, says power and electrical applications are much harder to substitute than other copper consuming segments. Mr Kettle says about 200,000 tonnes of demand or 1 per cent of world demand has been lost over the past two years and most of this will be permanent. He says the plumbing segment has suffered the bulk of these losses to plastics while heat exchange applications are seen as the next area to come under threat, with aluminium the alternative material. The knock-on effect of the expansion of the Chinese power network results in more demand for electrical applications in the home. Beijing Antaike estimates air conditioning and refrigeration accounted for a combined 15 per cent of Chinese copper demand. In contrast, consumption in the power and electronic sector accounts for about a quarter of copper demand in the US. However, China is not the only country expanding its power network. The International Energy Agency, the energy watchdog of the industrialised world, warned that the world would have to spend $10,000bn on electricity generation to avoid power shortages, which have struck US, Europe and Asia in recent years. China is investing in line with IEA projections but India, where 500m people do not have electricity, is falling behind. The Indian government has targeted capacity increases totalling 100,000MW over the next 10 years.However, so far the effect on copper demand has not been as pronounced. Indian usage rose about 40 per cent to 396,000 tonnes a year in the five years to 2005.

Emerging producers: Price rises and deposit hunts By Rebecca Bream Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 With copper trading at record prices it is not surprising that geologists, mining company executives and assorted entrepreneurs are scouring the globe for new sources of the metal. Chile remains the worlds largest producer and still holds the potential for new deposits but the mining sector is increasingly looking elsewhere for the next big find. Chile produced 5.3m tonnes in 2005, but neighbouring Peru was showing signs of catching up. From 405,000 tonnes of production in 1995, Peru produced 1m tonnes last year. The growth in output reflects the large amounts of money being invested by mining companies in the country, such as BHP Billiton of the UK, Phelps Dodge of the US, and Falconbridge and Teck Cominco of Canada. Political uncertainty is clouding the future of Perus industry, however. Ollanta Humala, a front runner in Perus forthcoming presidential elections, has said he will place windfall taxes on mining company earnings if he wins power and has railed against what he sees as the looting of the nations mineral resources by multinational companies. On a more local level, protests against specific mining projects have caused delays, for example to Monterrico Metals planned Rio Blanco mine. Political factors have caused a number of projects to be delayed, says John Meyer, mining analyst at Numis Securities in London. Peru is known for a level of local protest, as people see money [from mining] going into local coffers, but feel they dont get much out. Mr Meyer adds that mining in mountainous Peru is physically challenging and requires a greater level of environmental sensitivity. Any water polluted by mining would travel down the valleys and affect large numbers of local people. Antofagasta, the Chile-based copper group, is part of an exploration joint venture in Peru with Companhia Vale do Rio Doce (CVRD), the Brazilian mining company. But at the end of last year, Antofagasta surprised the market by expanding out of its base in South America, and into Asia. In December the group made an investment in Tethyan Copper of Australia, which owns the Reko Diq project in south-west Pakistan. Antofagasta has since bought the whole of Tethyan, in partnership with Barrick Gold of Canada, and is pressing ahead with the development of Reko Diq. The mine is expected to hold as much as 12.3m tonnes. The best prospects for finding new deposits lie in the Democratic Republic of Congo, say analysts. In the late 1980s, the mineral-rich but war-torn country then known as Zaire was the worlds fifth largest producer of copper and the number one

producer of cobalt. But a bitter five-year civil war halted mining, and stopped the development of a number of new projects. Everyone knows there is still a lot of copper there. The pickings are getting slimmer now in Chile, Peru and Argentina, so money is moving back into the DRC, says Paul McTaggart, mining analyst at HSBC in London. The war officially ended in 2002, and the DRC is now ruled by a coalition of former enemies headed by president Joseph Kabila. The DRC plans to hold its first multi-party elections for four decades later this year, although the elections have already been hit by delays. Investment and working conditions in the DRC have improved in the last few years, but analysts say there is still very little infrastructure there, and social unrest remains a problem. For this reason, the large mining groups have so far held back from making major investments in the DRC, and most of the exploration activity is being carried out by smaller, less risk-averse groups such as Anvil Mining, First Quantum Minerals, Adastra, Mwana Africa, CAMEC and Copper Resources. It will be another few years before the major mining companies go into the DRC, says Mr Meyer at Numis. At the end of last month, Perth-based Anvil shut down operations at its Kulu mine near Kolwezi in the DRC after one of its workers was killed. According to reports, a group of illegal miners set fire to an Anvil guesthouse, killing an Anvil worker and a security guard. Anvil reopened its mine last week, but the companys problems highlight the lawless conditions in the DRC. Nearby Zambia is viewed as a less risky prospect and many companies including Vedanta Resources, which bought the Konkola Copper Mines from Anglo American in 2004, are investing in the area. Vedanta is trying to boost production and cut costs at Konkola, after many years of under-investment. Another area being looked at by miners is the former Soviet Union, including Kazakhstan and Mongolia, where Ivanhoe Mines of Canada continues to develop the Oyu Tolgoi deposit. Ivanhoe has yet to secure a mining licence for the project, but claims that it is one of the largest undeveloped deposits in the world. Kazakhmys, Kazakhstans largest miner, made a splash last October when it listed on the London Stock Exchange, raising 661m. Analysts say the companys assets are relatively small and not particularly high quality, but are very low cost. With costs at about 30 cents per pound of copper, and market prices at more than $3 per lb, Kazakhmys is accumulating large amounts of cash and plans acquisitions in other minerals. Rising political risk around the world should underpin high prices, as the development of new sources is delayed. Political risk is on the rise, wherever you go, says Mr McTaggart at HSBC. John MacKinnon, mining analyst at Deutsche Bank in London, says: We have already got a serious shortage of copper. The question is whether there is an

inventory of high quality exploration projects out there that can progress to the production stage. And if so, how quickly can they be developed? The lead times [on new mines] are so much longer these days, partly because there is a shortage of trained people, he says.

Medical market: Germ of an idea for fighting bugs By Lisa Urquhart Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 The cleansing properties of copper have been well documented over the centuries. Hippocrates, the father of modern medicine, used powder of copper oxide and copper sulphate on open wounds and mentioned it as a cure for leg ulcers. Despite the fact that bacteria were not discovered until the 19th century, copper vessels were often used in Egypt to help with the sterilisation of drinking water, while the Aztecs would gargle with copper mixtures to cure sore throats. In ancient India and Persia, copper was used to treat lung diseases and compounds such as malachite and copper oxide were used on boils and other skin conditions. Recent advances in the pharmaceutical industry have brought a decline in medicinal use but this very progress in medicine leading to the overuse of antibiotics and creating, in turn, a generation of superbugs has once again turned medical attention to copper. Leading the new-found interest in coppers unique ability to destroy a range of microbes have been Bill Keevil and Jonathan Noyce of the University of Southampton in the UK. The main focus of their work has been on methicillin-resistant staphylococcus aureus, more familiarly known as MRSA. The hospital-acquired infection has become resistant to all but a handful of antibiotics and there are genuine fears that these treatments will eventually fail. If these microbes are becoming more resistant to drugs then you have to ask what we have to control them and the answer is copper. From what we have seen it should give us a good chance, says Prof Keevil. His confidence is based on studies that he and Dr Noyce conducted in 2004. These showed that at room temperature MRSA bugs were able to remain active for more than three days. But on copper and its alloys the survival rates fell dramatically from between four and a half hours and three on brass and bronze, respectively, to just one and a half hours on almost pure copper. One of the first lines of defence in treating any outbreak, says Prof Keevil, is to limit transmission. Coppers ability to destroy microbes makes it ideal for push or touch surfaces such as taps, door handles, push plates and stair rails, areas where cross infection is likely to occur, he says. Unfortunately, copper in its pure form is a far from functional metal, being soft and easily corroded. But the research team has experimented with a number of copper alloys that are both stronger and just as effective at killing germs.

These alloys can also be engineered to have the silvery look of stainless steel that people associate with cleanliness. Harold Michels, vice-president of technical and information services at the US Copper Development Association, which sponsors the research carried out by Prof Keevil and Dr Noyce, is submitting proposals to fund hospital trials looking at whether or not infection levels in intensive care units can be reduced. We will be looking at bed frames, IV [intravenous] drip poles, keyboards, doors, basically the important surfaces where you can make a difference. We expect to begin the trials by the early fall when funding is in place, says Mr Michels. But it is not just hospital infections on which the duo at Southampton are targeting their research efforts. They have more recently found that copper is also effective against certain strains of influenza. When placed on copper the H1N1 strain of flu was almost neutralised within six hours, compared with the 24 hours for the virus on stainless steel. Given that the H1N1 strain is almost identical to avian flu H5N1, it follows that the same effects should be achieved. Prof Keevil says this could encourage the use of copper alloys in poultry farms. He also believes that given most flu transmission is through contact rather than sneezing, copper compounds could be used in hand washes to protect against crossinfection. If the metal does prove a suitable defence against bird flu there exists a huge potential to use copper ions in filters and fabrics offering those working with the virus, such as the emergency services, increased protection. While most of the focus so far for uses of copper has been antibacterial, for preventing transmission of infection, coppers well-documented anti-inflammatory properties arthritis sufferers often wear copper bracelets are now also providing researchers with new uses for the metal. A range of studies has shown that when copper is used in conjunction with antiinflammatories such as ibuprofen, it not only helps to increase the effectiveness of the drug, assisting in reducing dosages, but also reduces the commonest side effect of non-steroidal anti-inflammatories namely, ulcers. Last year Peter Lay of the University of Sydney started animal tests that showed that adding copper ions to anti-inflammatories reduced stomach ulcers by 80 per cent in animals. Prof Lays research team hope to start testing in humans either by the end of this year or the beginning of 2007. More recently researchers have started to look at the ability of some organic copper compounds to destroy cancer, by preventing the breakdown of certain proteins within cells, a process which causes cell death. Conversely some tumours are marked out by the relatively high levels of copper contained within the cells, leading some to argue that diagnostic tests on copper levels could lead to the detection of tumours. This dichotomy about the role of copper in the medical field demonstrates that there is still much more to learn about the red metal and its role both in preventative healthcare and advanced treatments.

Phelps Dodge: Hedges planted out of season By Bernard Simon Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 Phelps Dodge took out some insurance last year as it embarked on ambitious plans to expand its operations on three continents. The Arizona-based company, which is the worlds number-two copper producer, decided to hedge a portion of its sales as a way of ensuring that it would have no trouble financing a growing list of projects, even if the fizz went out of metal markets. The outcome has been rich in irony, considering that Phelps Dodge is widely viewed as the purest copper play in the equities market, and thus the company that investors might expect to benefit most from the rocketing copper price. The hedges, in the form of collars and put options, locked in a quarter of 2006 sales at a price of $1.63 per lb, and 20 per cent of next years sales at $2. But with the price soaring to $3.30 in late April, the cautious approach has turned out to be costly. Phelps Dodge took a $298.4m after-tax charge in the first quarter to account for the hedge positions at current market values. In spite of the record metal price, earnings slid by 13 per cent to $333.8m. Phelps Dodge has a reputation for conservatism, nurtured by stringent efforts to hold down costs in the 1980s when many copper producers were fighting for survival. Referring to the hedges, Steven Whisler, its chief executive, told analysts in late April that we wanted to try to protect the downside so that we had adequate cash to protect an aggressive capital programme. None of the current hedge positions is being closed out, though Mr Whisler expects that our need for price protection programmes will be reduced over time. In spite of the setback, the economic benefit of the strong copper market is still very noticeable in Phelps Dodges bottom line and balance sheet, says Dan Roling, analyst at Merrill Lynch. Operating cash flow grew by 69 per cent in the first quarter and cash reserves reached $2.2bn on March 31. The cash holdings could rise to about $3.6bn by the end of the year, based on a copper price of $2.82 per lb. Amir Arif, analyst at Friedman Billings Ramsey, raised his target price for Phelps Dodge shares from $81 to $86 after the earnings report. The shares shot up to that level the next day. The company has said that it will use the growing cash hoard to invest in existing businesses, improve the quality of assets, strengthen its balance sheet, and reward shareholders meaningfully. Payment for the 2006 hedging collars is likely to reduce the cash balance by $645m. Shareholders are set to benefit this year from $1bn earmarked for share buybacks and increased dividends. A special dividend of $5 a share was paid in late 2005. The list of new projects grew longer in April with the announcement of plans to reopen the Climax molybdenum mine in Colorado at a cost of more than $200m. The mine was mothballed in 1995. Phelps Dodge is also spending about $550m to build the first sizeable copper mine in the US since the 1970s. The property, near Safford, Arizona, is due to come on stream in 2008 with an output of 240m lbs a year.

In Latin America, production at the 54 per cent-owned Cerro Verde open-pit mine in Peru is being trebled at a cost of $850m. A pioneering concentrate leach plant is under construction at Morenci, Arizona, at a cost of $210m. The process is designed as an alternative to traditional smelting and refining of copper concentrates, saving an estimated 15 cents per lb. Phelps Dodge has also taken a growing interest in the Tenke-Fungurume copper and cobalt deposit in Congo. While Tenke-Fungurume is considered one of the highestgrade undeveloped deposits in the world, development has been dogged by political unrest. A London-based analyst says the US companys involvement has added credibility to the project, which was previously promoted mainly by small exploration outfits. A final feasibility study is expected within the next few months, with mine construction starting early next year. The biggest uncertainty for now is the copper price. Mr Whisler, echoing many others in the industry, observed that the market is in uncharted waters. While demand remains strong and stocks are tight, the high price has discouraged inventory replenishment. Mr Whisler worries more about wild swings in the metals price than its absolute level. The volatility certainly creates an environment where further use of substitute materials is given greater consideration, he said.

Chiles copper: Surplus spells woe for exporters By Paul Harris Published: May 9 2006 10:39 | Last updated: May 9 2006 10:39 With record copper prices, Chiles finance minister Andrs Velasco is something of a Janus these days one moment grinning broadly because of the windfall that is coming to the country, the next frowning sympathetically with exporters threatened by the Chilean pesos strength. Copper will generate $27bn in exports for Chile this year, according to Eduardo Titelman, executive vice-president at state copper commission Cochilco, generating $11bn of fiscal income and boosting GDP per capita by $1,300 to $8,330 in 2006. Chile has never had it so good, or has it? Copper, representing 45 per cent of exports, is giving Chile what one observer calls a whopping trade surplus, which Santiagos Celfin Capital forecasts at $12.5bn for 2006. This is what is making Mr Velasco smile. But rising copper income has seen the peso strengthen from 700 to the dollar to 510, past the 550 mark that Catholic University economist Rolf Lders (a member of Chiles influential monetary policy group), thinks is its long-term normal exchange rate. The increase in the copper price of the magnitude we have had in the last 15 months represents a big problem for the Chilean economy, says Mr Lders. The Ricardo Lagos presidency saw increasing diversification of the economy into fruit, wine, forest products and salmon but the peso is now so hot that some fear it will burn away non-copper export sectors. Producers of fruit, salmon and wine are feeling the pain, as economists talk of the possible onset of Dutch disease the deindustrialisation that can occur if high

commodity prices boost currencies and undermine the competitiveness of manufactured exports. The peso has appreciated 50 per cent in the last three years. Seventy per cent of our costs are in pesos so we have lost 35 per cent of our competitiveness. Investment in the agro-industrial sector is paralysed, says fruit exporter Andres Ballas of Exportadora Los Lirios. Exporters are unlikely to find succour from the autonomous central bank, at least while the peso remains above 500 to the dollar, below which commentators such as Mr Lders think it will be in dangerous territory. However, the administration of president Michelle Bachelet is taking action to cool off the currency. The treasury has announced measures to ease currency pressure including an offshore dollar fund, and SII, the state tax agency, says it will accept tax payments in dollars. We are looking to reduce the additional pressure on the falling exchange rate that occurs on the tax payment due date when many companies liquidate dollar positions to obtain Chilean pesos to meet their tax obligations, says Ricardo Escobar, SII director. But while the government does not want Chile to become a one-commodity economy, it is determined to maintain the countrys share of world copper output and the benefit it receives from the red metal. Following two decades of massive expansion Chile has entrenched itself as the worlds leading copper producer, accounting for 35.6 per cent of world mine production at 5.32m tonnes in 2005. Production is forecast at 5.45m tonnes for this year and is predicted to grow to 6.7m tonnes a year by 2012, according to Cochilco, with 2.2m tonnes of new capacity coming on stream. Industry figures think Chile still has what it takes to maintain its leading position. Francisco Costabal, president of mining association Consejo Minero, says Chiles stable political, economic and social environment means it will continue to attract long-term mining investment, particularly given its extensive copper reserves. Chile had 370m tonnes of copper reserves in 2005, representing about 39 per cent of worldwide reserves, says Mr Costabal. That stability will be challenged this summer as companies brace themselves to battle workers looking to share in the copper bonanza. There is a lot of greed in workers across the globe that want a copper price bonus. The labour market is working against copper, says Cesar Perez, analyst at Celfin Capital in Santiago. Consejo Minero informally applies peer pressure on its members to resist strike demands, but that could be a moot point this summer as the giant Escondida and Chuquicamata mines, which represent 2m tonnes a year of production, have to renegotiate collective worker contracts. The companies will give workers the copper bonus to keep the mines open but not a pay rise, says an executive at a major international company. With no megaprojects in the pipeline, labour fears could add to concern in Chile that investment dollars may start heading to emerging copper countries such as China, Australia, Mexico and Indonesia. Although exploration expenditure is increasing, Chile lost its regional top spot on this measure in 2005, having been overtaken by Peru, Mexico and Brazil.