Potential gains and potential losses with Copper

By D.Munkhchimeg
Copper is often viewed as a barometer for the global economy. As one of the main raw materials of the industrialized society, this red metal has an ability to forecast economic situations. Today’s European debt crisis and China’s slowdown have both battered international copper prices.
Originally, Mongolia only exported copper. Now, Mongolia generates high revenue from the exportation of coal, iron ore and other precious metals. Recently, the income from coal export doubled copper concentration export earnings. However, copper is still the main source of the budget revenue.

This year, for example, it is estimated to collect 402.6 billion MNT from coal, and 561.2 billion MNT from copper. Moreover, the red metal likely to get back its moniker “engine of Mongolian economy” when Oyu Tolgoi, the world’s largest untapped copper-gold deposit, starts production. Therefore, the large swings in commodity prices in recent months are a source of concern.  Supported by strong demand in China, the copper price by February this year had surpassed its all time record, reaching USD 10,190 a ton on London Metal Exchange (LME). However, since August it have fallen by more than 20 percent to USD 7,263 a ton now and, with the global economic environment deteriorating, could fall further. As we can keep track of LME copper prices to gauge Mongolian export and fiscal earnings, let’s take a precise look at copper market.

Mongolian Copper
Statistics show that in first 9 months of this year, Mongolia exported 475 thousands ton of copper concentration and earned USD 828 million. Thanks to high prices at world market in first half of this year, the dollar value of copper exports rose by 30 percent. However, in volume terms, exports are barely changed, as country's single largest mine is the Erdenet deposit. However, the bright future is waiting for Mongolian copper industry.
Ivanhoe Mines is on target for production at Oyu Tolgoi commencing in the second half of 2012, according to its third quarter report. The impact of this huge project on the Mongolian economy will be significant, that Cameron McRae, Oyu Tolgoi`s CEO, pointed out that the mine would boost the GDP of the country by 33 percent by 2020. According to Cameron McRae, by 2019 Oyu Tolgoi will become one of the top five copper mines in the world, and will surpass the production of Erdenet. Moreover, earlier this year, BMO Capital Markets listed Oyu Tolgoi as the best new copper project for long-term profits, ranking the mine as the second best new source of copper in terms of production capacity. Furthrmore, there are other signs that Mongolia will face copper export bonanza very soon. Tsagaan Suvarga, another strategically important copper deposit, likely to be operational since 2015, according to D.Zorigt, the Minister of Mineral Resources and Energy. Mongolia has 1.2 billion tons of copper ore reserves, and copper export likely to hit a million tons by 2020, he stated at “Metals Mongolia 2011″ forum.
However, the concern is even more acute as stresses in the global economy became deeper. The Telegraph reported that Rio Tinto, which owns 49 percent of Ivanhoe Mines, warns of slowing markets. Rio`s CEO Tom Albanese said Rio was yet to feel the full brunt of the European crisis, though he voiced concern Europe’s plight would inevitably touch China, its biggest buyer.
China consumes about 40 percent of global output of around 16 million tons in 2010. However, the current economic issues across Europe and the United States could downsize China’s role as the world’s largest copper consumer, and then affect the country’s copper demand, experts warned. The manufacturing monster-China is expected to suffer a rapid slowdown following the collapse in demand across the Eurozone, its largest export market.
Unstable Fund
During the previous boom in commodity prices, Mongolia did not save enough of the windfall revenues. Therefore, when the copper price, which hit USD 8,900 in the summer of 2008, fell to a figure three times lower due to the financial crisis  within just a half years time, the government had no choice but to borrow money from donors. Because the subsequent fall in prices directly impact export and fiscal revenues, making the GDP growth fell from 8.9 percent to minus 1.3 percent in 2009. In order to avoid experiencing such a hardship again, the Parliament adopted the Fiscal Stability Law, which mandates the saving of excess mineral revenues in a Stabilization fund.
However, a future problem of the Stabilization Fund is that the fund is expected to reach only MNT 219 billion by the end of this year, amounting to merely 2 percent of GDP. “This suggests limited space to provide a stimulus in case of sharp terms of trade shock that undermines mineral revenues,” the World Bank warned.
The Ministry of Finance is estimated, that Stabilization fund will earn 381 billion MNT next year, 168 billion coming from the copper industry. According to the budget of 2012, copper price is expected to be at USD 9,760 per ton next year while its balanced price is calculated to be at USD 6,663 per ton. In other words, the Stabilization Fund could not accumulate money from copper production, if prices fall below USD 6,663.
So, there are risks that optimistic forecasts from Ministry of Finance may not materialize, as the news and media are full of gloomy forecasts and dire predictions about copper prices.
The Bank of America Merrill Lynch forecasting lower average copper prices in 2012 of USD 7,750 per ton, compared with USD 8,785 per ton in 2011. “Copper prices have already dipped below our long-held forecast of USD 7,500 per ton for 2012. And now we see prices falling back to USD 6,000 or even lower next year,” pointed out experts at Capital Economics.


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