Morgan Stanley: Copper - Anatomy of a Bull Market


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October 14, 2011, Morgan Stanley report on the various trends and conditions that are impacting long term copper demand, production and price.

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Morgan Stanley: Copper - Anatomy of a Bull Market

  1. 1. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull Market October 14, 2011 PRODUCT NAME [ e.g., OVERVIEW, PRIMER, DATA ] MORGAN STANLEY RESEARCH Global Metals and Mining Global Metals and Mining Team Copper – Anatomy of a Bull Market Morgan Stanley Australia Limited+ Peter G Richardson Chief Metals Economist +61 3 9256 8943 Joel B Crane Commodities Analyst +61 3 9256 8961Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subjectcompany, public appearances and trading securities held by a research analyst account. 1
  2. 2. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketCash copper prices vs mine production cash costs, 1981-2011• Over the past decade, the copper market has undergone a remarkable transformation• Industry operating margins for mine production have expanded persistently since 2004-05, with the notable exception ofthe global recession of 2008-09.• As this chart shows, since 2003 refined copper prices have traded materially above marginal cost for more than 80% ofthat time.• When seen in a historical context, this is a highly unusual development and indicative of structural changes in the coppermarket, which are both deep rooted and long lasting. 10,000 USD/t 9,000 50th Percentile 60th Percentile 8,000 70th Percentile 80th Percentile 7,000 90th Percentile LME Cash Copper Price 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Source: Brook Hunt, Morgan Stanley Research 2
  3. 3. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketLong-run real and nominal copper prices, 1949-2011• Another indicator of longer run structural and cyclical change can be seen in the analysis of real prices which since 2002have broken out of a long-run declining trend for the first time since the period of post WW2 reconstruction between 1949and 1970.• In our view, these important indicators of structural changes reflect irreversible changes to consumption and all levels ofthe supply chain that have swept away the old structures of OECD driven demand, western world supply and east-westtrade.• In its wake, a truly global market has emerged but one characterized by structural issues that are preventing theestablishment of a new equilibrium between demand and supply and the establishment of a new price range much closer tocurrent marginal costs.• As a result, copper prices are expected to remain elevated and well above marginal cost until such time as the globalinventory pipeline is replenished and a more reliable supply environment ensues.• This is not expected before 2014-15 at the earliest for reasons that are discussed in this presentation. 1949 – 2011 1990 – 20115.00 US$/lb 12,000 US$/t4.50 10,0004.00 Real Real3.50 Nominal 8,000 Nominal3.002.50 6,0002.00 4,0001.501.00 2,0000.500.00 0 1949 1959 1969 1979 1989 1999 2009 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Source: Reuters, Morgan Stanley Research 3
  4. 4. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketChina industrial production growth vs refined copper price, 1999-2011• The demand side of this story is widely known.• In effect, the cumulative impact of an extended demand shock over the past 15 years that is directly linked to theindustrialization of China, has resulted in an upward shift to the global demand curve.• While cyclicality is still strongly evident both in the refined copper price and the trajectory of Chinese industrial productiongrowth, the cumulative impact of this demand shock is evident from the persistent trend increase in copper prices between2003 and 2006 and the elevated volatility in these prices thereafter.• The impact of these developments on prices over this time was further intensified by the simultaneous consumption boomin the developed economies of North America and Europe, which both facilitated China’s industrial lift-off through a rapidgrowth in manufactured imports and an increasingly rapid technology transfer that accompanied or resulted from foreigndirect investment. 5.00 US$/lb IP growth (YoY%) 25.0 4.00 20.0 3.00 15.0 2.00 10.0 1.00 5.0 0.00 0.0 1999 2001 2003 2005 2007 2009 LME Copper Price (LHS) China IP growth (RHS) Source: Reuters, Morgan Stanley Research 4
  5. 5. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketChina and India urbanization trends, 1950-2025E• This slide illustrates the impact of China’s industrialization and urbanization more directly.• From the perspective of China and this presentation, the key date appears to be between 1980 and 1995 when the trendof rapidly rising urbanization rates became firmly established.• Consistent with trends in industrial production, this development accelerated over the past decade, helping insulatedemand for industrial raw materials from cyclical fluctuations in the global economy.• India has been later and slower in this development, but now appears to be firmly set on the same path, a supportiveadditional long-term demand driver. China and India: Percentage of Population Residing in Urban Areas (%) 80 73 China India 71 70 68 65 62 59 60 55 54 51 51 50 47 47 43 43 40 40 36 37 34 31 32 29 30 30 27 28 26 26 23 23 24 21 20 19 17 19 20 17 18 18 18 16 17 14 12 10 0 2010E 2015E 2020E 2025E 2030E 2035E 2040E 2045E 2050E 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Morgan Stanley Research 5
  6. 6. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketSectoral Breakdown of Copper Consumption in China and Global, 2010• One consequence of this development has been a notably different sectoral breakdown of copper consumption in Chinaby comparison with the global end use patterns.• China’s sector breakdown of copper consumption reflects the strong impact of fixed asset investment demand for power,telecommunications and transportation infrastructure and a relatively low level of sectoral exposure to the constructionsector.• This is in marked contrast to the global pattern of consumption which reflects a much higher proportion of constructionand consumer electronics related demand, and a much smaller exposure to power and other infrastructure-relateddemand.• Over time, as per capita urban incomes increase, we would expect to see this sectoral breakdown in China reflect morebroadly its global counterpart, shifting more towards automotive and consumer electronics products. Market Sector - Global Market Sector - China Consumer Others Products 11% 8% Transport Construction 13% Construction 9% 33% Power Electronics 46% 8% Industrial Machinery 13% Transportation 11% Electrical & Electronic Air-con and products fridge 33% 15% Source: Brook Hunt, Morgan Stanley Research 6
  7. 7. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketGrowth in global refined copper consumption, 2000-2016E• This slide shows not only the material increase in copper consumption of the past decade that has resulted from thisupward shift in the demand curve, but the anticipated further growth in demand for refined copper out to 2016, the end ofour active forecast period.• The continued shift in the regional distribution of consumption within this growing trend is also evident, with China’s shareof global consumption rising to 45% at the end of this period.• The ongoing shift to emerging market consumption is also evident in the further increase in market share to 10% for theother three BRICs economies.• Equally important will be the continued decline in both absolute share and growth rates of copper consumption by themajor developed economies during this coming decade. 2000 Consumption - 15.1 Mt 2016e Consumption - 27.4 Mt China 13% ROW ROW BRI (Brazil, Russia, 24% 28% India) 5% 2010 Consumption - 21.3 Mt China USA ROW 45% 19% 24% Japan Japan 4% 9% China 39% W Europe W Europe 26% 11% Japan 5% USA 6% BRI (Brazil, Russia, India) 10% W Europe 16% BRI (Brazil, Russia, USA India) 9% 7% Source: ICSG, Brook Hunt, Morgan Stanley Research 7
  8. 8. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketChina’s mineral saturation curves• Consistent with previous industrialization and urbanization events, China’s rapid increase in demand for copper isexpected to continue until per capita income exceeds US$20K.• According to research by Rio Tinto, this is unlikely to be achieved before 2020-2030, even if the rate of annual increase inconsumption moderates as the trend reaches maturity.• However, it is possible that the anticipated decline in the importance of FAI growth and the concurrent transition toconsumer related demand will have some impact on the timing of this event. Source: Rio Tinto company presentation 8
  9. 9. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketCopper mine production growth (concentrates) by region, 2000-2016E• The impact of this structural shift in the copper demand curve has been intensified, in our view, by the fact that China’srelatively poor natural resource endowment of economic copper minerals has necessitated a structural dependence onimports.• These charts show that despite a rising volume of concentrate production and a near doubling of China’s share of globalmine production over the past decade, mine output of contained copper remains well short of the current and anticipatedfuture level of copper consumption.• While this has spawned a significant increase in China’s custom smelting and refining capability, ultimately thisdownstream production capability remains dependent on imported feedstock for a material proportion of supply. 2000 Production - 10.9 Mt 2016e Production - 15.7 Mt ROW Africa 5% China ROW 12% Africa 5% 7% Peru 11% Australia 5% Peru China 8% 12% 10% USA 13% 2010 Production - 13.9 Mt ROW Africa 7% 11% Canada Australia Peru 6% China 6% 9% Chile Mexico 10% 43% 3% USA 10% Australia 7% Canada Chile 3% 38% Mexico USA 3% 9% Canada Chile 4% 41% Mexico 2% Source: ICSG, Wood Mackenzie Brook Hunt, Morgan Stanley Research 9
  10. 10. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketChanging distribution of copper mine and refined production, 2001-10• This chart shows these same Copper mine production (% chg 2001-2010)trends in a different way,highlighting the emergence of a 160% 140%sizeable and influential custom 120%smelting and refining capability 100%in China. 80% 60%• This is an increasingly 40%important source of supply of 20%refined copper to meet China’s 0% -20%rising consumption, but it does -40%not mask the continued il . a li a az da ile in a ng o es ia I ra n xic o oli a Pe ru ed te s mb iadependence on imports of st r Br na Ch Ch Co on Me ng nF S ta Au Ca Ind Mo ia ed Za ss n it Ru Ucopper concentrate and scrap *Brazil +611%, Congo +795%to supply this growing refinerycapacity.• Indeed, the continued Refined copper production (% chg 2001-2010)mismatch between Chinese and 160% 140%other emerging market smelter 120% China +202%and refining capacity, and the 100%availability of concentrates has 80% 60%had a sustained impact on 40%treatment and refining terms, to 20%the longer term benefit of 0% -20%miners producing for the custom -40%concentrate market. -60% lia az il da i le in a an y ia n p. ru d d. a in es ia tr a Br na Ch Ch In d pa Re Pe lan Fe Sp ta t mb s Ca rm Ja n Po n dS Za Au Ge r ea s ia e Ko R us U n it Source: ICSG, Morgan Stanley Research 10
  11. 11. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketChina copper imports, 2006-2011• This chart illustrates the changing market shares of the different forms of imported copper into China over the past fiveyears.• From this it can be seen that besides a continued dependence on imports of refined copper, a larger proportion of importsof refinery and semi-fabricator feed is drawn from the scrap market, than from the concentrate market.• We would expect this reliance on imported scrap feed to continue along with the dependence on concentrate imports,especially during the first phase of China’s industrialization, as old scrap generation remains low and with higher pricesforcing buyers to seek cheaper forms of copper.• These import trends are expected to remain broadly consistent over the coming decade, given the upside limits todomestic mine production based on current and future anticipated reserve development. 1,000 Kt 900 800 700 600 500 400 300 200 100 0 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Refined Scrap Ores and Cons (Cu content) Source: Reuters, Morgan Stanley Research 11
  12. 12. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketCopper prices and the China inventory cycle, 2004-2011• These trends in consumption growth and import dependence have had another important impact on the copper market.• As China’s consumption of refined copper (whether drawn from imported or domestic concentrate or scrap) hasincreased, so too has the impact of China’s inventory cycle on shorter term prices and volatility.• Since 2006, there have been three marked cases of de-stocking and two cases of re-stocking which have hadpronounced impacts on price.• This is because the changes in the volumes of refined imports acts as a transmission mechanism for changes in short-term demand for refined copper.• We expect these trends to persist, even if the increased importance of non-refined imports of copper lowers themagnitude and duration of these refined inventory cycles. US$/lb 300% 5.00 De-stocking 240% 4.00 180% 120% 3.00 60% 2.00 0% -60% 1.00 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 LME copper price (RHS) YoY chg in Chinas copper imports (3mma) Source: Reuters, Morgan Stanley Research 12
  13. 13. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketRefined copper inventories vs refined market balance, 1998-2011• No bull market of the magnitude or duration of copper bull market could have emerged or been sustained by demandfactors alone.• In our view, concurrent and reinforcing structural changes in the supply side of the copper market have also played amajor role in the sustained expansion of operating margins that has been the happy experience of established producers inthis industry.• This slide shows the growth of copper consumption plotted against refined market balances over the past 12 years. Theincreasing frequency of deficits, and the declining size of surpluses over this time points to structural constraints on supplyresponse, which has become manifest in widening cash and operating margins for copper miner producers over time.• This development has its origins in the deterrent effect of the multi-decades low real copper prices recorded in the late1990s and early 2000s on exploration spending, commercial discovery and project development.• Always a challenge, the industry became increasingly reliant on its installed mine capacity and large post-recessionaccumulation of stock to match the demand shock that unfolded from China. 2,500 Kt 1,000 Kt 800 2,000 600 400 1,500 200 0 1,000 -200 -400 500 -600 -800 0 -1,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total exchange stocks Consumers, producers & merchants2011 Government Refined market balance, surplus/(deficit) - RHS Source: ICSG, Reuters, Morgan Stanley Research 13
  14. 14. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketSequential refined copper stock-to-consumption ratio, 1995-2011There have been several long-term consequences of this development:1. The industry became progressively stripped of surplus inventories in exchange warehouses and producers and consumer storage2. This in turn has progressively lowered the sequential level of inventory in days of current consumption, increasing the industry’s vulnerability to negative supply and positive demand shocks.3. Since 2005, the copper market has had to adapt to an inventory environment in which the level of reported or transparent inventory has been at or below the long-term clearing level for the market, yet another tailwind for copper prices. 2500 Kt Days 60 50 2000 40 1500 30 1000 20 500 10 0 0 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Total commercial stocks (LHS) Stock to consumption ratio (RHS) Avg ratio Source: ICSG, Reuters, Morgan Stanley Research 14
  15. 15. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketTrends in global copper refinery feed, 2001-2010• Another important consequence of this development has been the marked increase in the importance of scrap in refineryfeed.• While this development also reflects the increased emphasis on recycling and the improved efficiency of copperrecyclers and changing sources of old scrap feed (i.e. information technology hardware), it also reflects the notable inabilityof the mining industry to materially increase mine production despite widening margins and rising incentives to liftproduction.• This is a complex issue which reflects a combination of project delays as a result of extended approval and constructiontimelines in many jurisdictions accompanied by slower than forecast ramp –up to full capacity in some cases.• It also reflects the impact of disruptions to current output as result of industrial action, power and water constraints andweather or natural disasters. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Primary (concentrate) Electrowon Secondary (scrap) Source: ICSG, Morgan Stanley Research 15
  16. 16. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketMine production has fallen short of potential output• Furthermore, this trend also reflects the impact of a sustained decline in head grades at existing operations as a result ofthe aging of the major mines that comprise the core of current output.• The impact of lower grades and higher impurities has resulted in lower recoveries and recurrent technical difficulties asexisting mine and processing infrastructure has been pushed to the limits of sustainable capacity utilization.• The result is that mine and refined supply from primary production has persistently fallen short of company and marketforecasts the past seven years.• Xstrata recently estimated that a combined total of 6.2Mt of potential contained copper in concentrate has been lost orforegone over this time as a result of the combined effects of these structural headwinds to supply growth. Supply has fallen short of plans Average primary copper head grades (%) 2005 2006 2007 2008 2009 2010 2011e 0 -200 Actual vs plan (Kt) -400 -600 -700 -800 -800 -850 -917 -952 -966 -987 -1000 Source: Wood Mackenzie Brook Hunt, Xstrata Copper estimates, Morgan Stanley Research 16
  17. 17. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketCopper treatment and refining charges vs price, 2002- 2011• The shortage of mine production as smelter and refinery capacity has continued to grow, has had a significant long-termeffect on the balance of power between miners and custom smelters and refiners.• Not only have treatment and refining charges fallen on a trend basis, price participation has all but disappeared from manycustom concentrate contracts, materially increasing net smelter returns to the miners and aggressively squeezing smelterand refinery margins.• While there have been recent signs of some relief for custom smelters and refiners as a consequence of the reduction incapacity in Japan following the earthquake and tsunami in March 2011, the announcement this week that the Onahamarefinery was returning to full production suggests that spot treatment and refining charges will start falling once again. 50.0 5.00 40.0 4.00 30.0 3.00 20.0 2.00 10.0 1.00 0.0 0.00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Combined TC/RC, USc/lb Month-end cash price, US$/lb (RHS) Source: Brook Hunt, Morgan Stanley Research 17
  18. 18. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketEmerging supply response - highly probable new copper mine projects…• Notwithstanding these persistent structural constraints on supply, the market is becoming increasingly nervous that we areclose to the end game of this component of the copper bull market.• This is the result of the increasingly large pipeline of major and smaller sized new projects that have been announced orare at an advanced stage of development, from 2013 onwards.• We anticipate that new mine capacity growth in 2012/13 will be 8.9% YoY, the largest annual increase since 2004.• Furthermore, this chart suggests that the rate of increase in new capacity will accelerate over the subsequent five yearperiod, reaching a peak in 2018, by which time the copper market is expected to have finally found an existing and installedproduction base that will allow prices to trade once again close to their marginal cost. 1,400 Kt of Cu 1,200 1,000 800 600 400 200 0 2013 2014 2015 2016 2017 2018 Mill - Greenfield Mill - Brownfield SxEw - Brownfield SxEw - Greenfield Source: Brook Hunt, Morgan Stanley Research 18
  19. 19. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull Market… but headwinds to rapid growth in new mine production are likely to persist• While we broadly subscribe to this medium term view, the headwinds to rapid growth in new mine capacity remainformidable.• Apart from the issue of grade decline and persistent constraint on current output, it is important to emphasize that newsupply is becoming increasingly dependent on greenfield rather than incremental expansions.• New projects are naturally higher cost, a feature that is being reinforced by the need for higher returns to offset risingpolitical risk, the greater exploration outlays that have to be recouped to exploit the growing number of blind deposits, andthe increased proportion of large scale underground mines. Location of copper supply C1 Composite cash costs by Indicative depth of discoveries mining method (2008, c/lb) 100% 5 9 90% 80% 36 41 70% 47 60% 50% 133 40% 95 30% 62 54 20% 44 10% 0% 1980s 1990s 2000s Open pit Underground 2000 2010 2020 Completely exposed Covered Blind Lower risk Medium risk Higher risk Source: Global Insight, Wood Mackenzie Brook Hunt, Rio Tinto, Morgan Stanley Research 19
  20. 20. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketSequential monthly supply/demand balance for copper, 2007-2011• This final slide is designed to provide a quick snapshot of how these structural changes to both demand and supply haveplayed out in recent years.• The sequential development of refined market deficits is clearly evident from this data, apart from a very limited periodduring the worst days of the 2008-09 global financial crisis.• Even this year, when developed market growth has slowed markedly and China has been in the throes of an intenseperiod of de-stocking, market deficits have been evident.• Whether this trend can be sustained in the wake of slowing OECD growth and with the rising threat of new mineproduction, is the key question now confronting financial markets.• Our conclusion is that history shows that structurally constrained markets are very resilient, even in the face of cyclicalchanges to the demand outlook. As a result, we still expect to see at least two to three more years of above averageoperating margins for miners, and strong above average returns for investors.• However, in this late phase of the bull market, volatility is likely to become more pronounced. 300 Kt 200 100 0 -100 -200 -300 -400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 2010 2009 2008 2007 Source: ICSG, Morgan Stanley Research 20
  21. 21. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull MarketCopper global refined supply / demand balance Unit 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e World IP growth (Adjusted PPP Weights) % 4.57 5.71 5.26 5.80 5.54 2.20 -2.61 7.31 5.37 4.77 4.76 4.81 4.44 4.31 World Mine Production Concentrates Mt 11.03 11.89 12.23 12.17 12.48 12.45 12.66 12.79 12.68 13.57 14.53 15.25 15.63 15.13 SX/EW Mt 2.72 2.71 2.69 2.83 2.99 3.09 3.25 3.32 3.43 3.89 4.04 3.95 3.84 3.71 Total Mine Production Mt 13.76 14.60 14.93 15.00 15.48 15.55 15.92 16.13 16.12 17.48 18.57 19.22 19.48 18.85 World Smelter Production Primary Mt 11.15 11.26 11.78 11.97 12.14 12.35 12.44 12.89 12.82 13.63 14.58 15.31 15.69 15.18 Secondary Mt 1.36 1.61 1.71 1.98 2.12 2.26 2.09 2.30 2.89 3.07 3.13 3.16 3.18 3.20 Total Smelter Production Mt 12.50 12.87 13.49 13.95 14.26 14.61 14.53 15.19 15.71 16.69 17.71 18.47 18.86 18.38 Capacity Mt 13.43 13.77 14.64 15.22 16.03 16.69 17.34 17.72 18.39 19.50 19.92 20.09 20.22 20.33 Smelter Capacity Utilisation Rate % 93.1 93.5 92.2 91.7 89.0 87.5 83.8 85.7 85.9 85.9 85.9 85.9 85.9 85.9 Primary/Secondary Ratio % 12.2 14.3 14.5 16.5 17.5 18.3 16.8 17.9 18.3 18.3 18.3 18.3 18.3 18.3 Imputed concentrate balance Kt -112.7 631.6 446.5 194.9 343.0 93.3 212.5 -97.6 -141.0 -54.9 -56.7 -58.9 -60.0 -51.5 World Refinery Production Electrowon Mt 2.72 2.71 2.69 2.83 2.99 3.09 3.25 3.32 3.43 3.89 4.04 3.95 3.84 3.71 Primary Mt 10.76 11.14 11.72 11.85 12.20 12.29 12.23 12.40 13.38 13.89 14.54 15.28 15.82 16.05 Secondary Mt 1.79 2.07 2.16 2.61 2.74 2.82 2.79 3.36 3.32 3.54 3.67 3.88 3.80 3.85 Total Refinery Production Mt 15.27 15.92 16.57 17.29 17.93 18.20 18.28 19.08 20.12 21.32 22.25 23.12 23.47 23.61 Capacity Mt 18.54 18.92 19.90 20.65 21.82 22.70 23.62 24.12 25.38 26.72 27.62 27.68 27.67 27.62 Refinery Capacity Utilisation Rate % 82.4 84.1 83.3 83.7 82.2 80.2 77.4 79.1 71.8 72.0 73.0 77.0 79.0 80.0 World Copper Usage Mt 15.72 16.84 16.67 17.03 18.20 18.04 18.10 19.33 20.32 21.27 22.20 22.94 23.36 23.44 World usage growth % 3.2 7.1 -1.0 2.2 6.9 -0.9 0.3 6.8 5.2 4.7 4.3 3.3 1.8 0.3 China usagegrowth % 24.5 11.9 8.0 -1.3 37.5 4.9 38.3 5.0 5.2 8.0 7.3 6.4 4.5 2.9 Non-China usagegrowth % -0.9 6.0 -3.2 3.1 -1.4 -3.1 -15.0 7.9 5.2 2.5 2.4 1.2 -0.1 -1.7 Regional Usage Breakdown China Mt 3.02 3.38 3.65 3.60 4.96 5.20 7.19 7.55 7.94 8.58 9.20 9.79 10.22 10.52 BRI (Brazil, Russia, India) Mt 1.04 1.27 1.38 1.47 1.48 1.54 1.20 1.45 1.77 1.89 2.07 2.24 2.38 2.48 USA Mt 2.24 2.41 2.27 2.13 2.14 2.02 1.63 1.63 1.66 1.65 1.60 1.56 1.50 1.40 W Europe Mt 3.72 3.81 3.47 3.84 3.62 3.43 2.75 2.93 3.00 2.98 2.91 2.82 2.71 2.55 Japan Mt 1.20 1.28 1.22 1.28 1.25 1.18 0.88 1.00 1.02 1.03 1.04 0.96 0.85 0.78 ROW Mt 4.49 4.69 4.67 4.71 4.75 4.66 4.46 4.76 4.93 5.15 5.37 5.57 5.69 5.70 Refined Market Balance Mt -0.44 -0.92 -0.10 0.26 -0.27 0.16 0.17 -0.25 -0.20 0.04 0.05 0.18 0.11 0.17 Refined Stocks End of Period Kt 1,780 923 867 1,131 1,051 1,342 1,415 1,266 1,064 1,107 1,158 1,337 1,447 1,619 Refined Stock Change Kt -268 -857 -56 264 -80 291 73 -148 -203 43 51 179 110 172 Apparent change in off-warrant stocks Kt -176 -64 -46 -8 -163 31 102 -98 0 0 0 0 0 0 Stock to Usage Rate Weeks 5.91 2.86 2.71 3.46 3.01 3.88 4.08 3.42 2.73 2.71 2.72 3.04 3.23 3.60 TC (US$/t conc.) US$ 58.0 43.0 85.5 95.0 60.0 45.0 75.0 46.5 75.0 70.0 68.0 68.0 68.0 68.0 RC (USc/lb Cu) US$ 5.8 4.3 8.5 9.5 6.0 4.5 7.5 4.7 7.5 7.0 6.8 6.8 6.8 6.8 LME Copper Price US$/t 1,780 2,863 3,684 6,727 7,126 6,952 5,076 7,536 9,245 8,378 9,149 8,267 7,055 6,173 LME Copper Price US$/lb 0.81 1.30 1.67 3.05 3.23 3.15 2.30 3.42 4.19 3.80 4.15 3.75 3.20 2.80 e = Morgan Stanley Research estimates Source: ISCG, Wood Mackenzie Brook Hunt, Morgan Stanley Research 21
  22. 22. MORGANSTANLEYRESEARCH Copper – Anatomy of a Bull Market Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings. Disclosures SectionThe information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for itscontents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registrationnumber 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to anymatters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, SeoulBranch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for itscontents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which acceptsresponsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley ResearchDisclosure Website at, or contact your investment representative or Morgan Stanley Research at 1585 Broadway,(Attention: Research Management), New York, NY, 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have notreceived and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Peter Richardson.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available US Regulatory Disclosures on Subject CompaniesThe equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon variousfactors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidityand specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investmentbanking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. MorganStanley may have a position in the debt of the Company or instruments discussed in this report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. 22
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