Sunday, May 15, 2011

World Copper Supply is Being Gobbled up by Residential and Office Construction in China

China consumes approximately 40% of the world's copper, making it by far the most important end market for the yellow metal. Copper prices are at near record highs currently (in mid-2011) a large part due to the strong demand from China, as well as flattening mine production of copper.

What exactly, is driving the massive consumption of copper in China? Copper is by far the best electrical conductor of the base metals - copper is approximately twice as conductive as its closest base metal substitute, aluminum -- making copper essential in any structure or product that utilizes electricity. It follows that as China industrializes, it will be a massive consumer of copper. According to BGRIMM, a copper research agency in China, construction and infrastructure accounted for 56% of total copper usage in China in 2007, and the broad category "general consumer goods" accounted for an additional 27% of consumption, as shown by figure 1:


According to copper.org, Copper has its largest use in residential and office construction as building wire -- electrically conductive wire built in the structure in order to allow electricity to be used in the structure through electrical outlets, air conditioners, computers, and other devices. The relative percentage useage of copper in a multi-family unit according to the copper.org is as follows:



It is useful to calculate the actual consumption numbers to give more detail on these overall categories. What is the percentage of copper in China consumed by laptop computer production (a laptop is approximately 6.9% copper by weight)? Office building construction? Mobile phone manufacturing -- note that the average mobile phone is approximately 13% copper by weight.

The author has calculated the expected copper consumption in China by residential and office construction, mobile phone, television set, computer (both desktop and laptop), power and telephone line, and automotive production. These results are presented in figure 3 and 4 below. Interestingly, even as China is, in the World Bank's words, the "world's manufacturing center," accounting for the manufacture of approximately 90% of the world's laptops, 50% of the world's mobile phones, and 30% of the world's television sets (among many other products that use copper) it appears that the overwhelming majority of copper in China is used in residential and office construction. The author's calcuations puts office and residential consumption of copper at 82.4% of the total consumption, presented in figure 3.

Figure 3: Calculated Chinese Copper Consumption by End Use:


The numbers of residential and office construction are estimated by the Economist Intelligence Unit for 2010, then the copper usage of these structures are estimated by applying similar per unit copper useages from US residential and office consumption. The sources for the numbers of products and km of infrastructure are including in figure 4 below.

The author's estimate of copper consumption by end use is different than the BGRIMM figures in chart 1 above, this is due to two factors: first, the BGRIMM numbers are for 2007, in which total infrastructure spending was lower than in 2010 (the year for which the author has estimated copper usage in China). Total residential construction totalled an incredible 2.4 Billion square meters in China in 2010, and office construction totaled an incredible 1.8 Billion square meters (more than a square meter of office space for every man, woman and child in China in 2010) according to the Economist Intelligence Unit. Second, there is likely significant error in the author's estimates of total copper consumption, as estimates are based on average copper usage per application, times total estimated application numbers (both variables are likely to have high errors in estimation, depending on the source of the numbers). BGRIMM, to the author's knowledge, does not disclose their methodology for estimating copper consumption by end use, so thye author was not able to determine sources of difference between this estimate and BGRIMM's estimate further.

It appears that copper usage in technological devices including PC's, netbooks, and mobile phones do not comprise a major component of overall copper usage for China. The author's calculations have these computing categories at only 2.1% of copper usage in 2010. This is due to the fact that as computing power increases, the size and weight of computing devices declines which means despite very large production numbers, the overall usage of copper is relatively small.

Even power cable appears to not be a massive driver of copper consumption in China. Power cable is typically a smaller copper core surrounded by aluminum insulation -- perhaps this is part of the reason why so the overall copper usage is not massive.

Copper consumption for residential and office appears to be the main source of demand in China, which makes residential and office building forecasts for China -- such as ones done by the Economist Intelligence Unit -- to be paramount in the forecast for the price of copper going forward.

A couple of notes on the supply side for copper: Approximately 38% of the world's supply of copper comes from Chile. Geologically, 75% of world's copper reserves exist in the form of copper porphyrys -- porphyrys are igneous rock (this is to say, rock relatively recently formed by volcanic lavas) and most copper sulphides are in the "Ring of Fire" -- a geological term for newly formed rock around the Pacific Ocean. Chile has the highest geological deposits of copper but is having difficulty increasing production significantly. The state owned Codelco -- which produces, along with BHP and Rio Tinto, the majority of Chile's copper -- warned in 2010 that without high levels of investment, its production of copper would fall by 50% over the next decade, due to declining copper grades. This, in turn, has led to some analysts warning of "Peak Copper" -- the inability of particularly Chile to increase copper production. Currently, Chile has projected that will expects to increase copper production levels modestly to 2020 based on an intensive capex program. However, uncertainties exist as to whether Chile can achieve this forecast in the light of the geological limitations presented by continuing declines in copper grade at the major Chilean mines.

In addition, it is interesting to note that according to geological estimates, almost all porphyry copper despoits were formed 500 million to 200 million years ago. This is to say, if humans had evolved 200-500 million years sooner, we would not have access to copper in any meaningful quantity on the surface of the Earth, and widespread usage of electricity would have likely not developed in industrial society.

Figure 4: Geological Date of Origin of Porphyry Copper Deposits:


Source: Source: Ore Metals Through History. Science, Vol 227, March 22, 1985 p 1421-1428

Figure 5: Calculations of Copper Usage by End Production/Infrastructure in China 2010
(numbers in millions of KGs of copper consumed)(bold indicates totals for each catagory)

Office 280 2800M sq m of office space added http://seekingalpha.com/article/256768-where-is-the-chinese-real-estate-bubble
Total office 2800
Residential Apartments 36.00 million, per year average 50 sq m http://www.slideshare.net/economistintelligenceunit/eiu-building-romeinaday
per apartment 80 http://www.copper.org/education/c-facts/c-home.html
Total Apartments 2,880.00 1.8B Sq M residential space added
Power Cable per km 70
Power Cable Total 511 7.3M km of cable capacity http://www.flykeyquartz.com/news_view.asp?id=58
Telecom Cable per km 80
Telecom Cable Total 0.8 10,000 km of copper telecomm cable added per year itri2.org/telecom/report/Chap9.PDF
High speed train 0.01 per km
Total High Speed Rail 20 about 2000 km per year
per PC 1.725
Total PCs 93.15 377M PCs + laptops worldwide http://www.computerworlduk.com/news/it-business/20788/idc-predicts-growth-in-desktop-and-laptop-pc-sales/
per laptop 0.207 6.9% copper, 3 kg av weight http://ask.metafilter.com/38447/How-much-copper-in-an-average-PC
Total laptops 39.33 approx 90% of all laptops made in China - 190M units www.redherring.com/Home/17724
per mobile phone 0.01469 kg http://www.nokia.com/corporate-responsibility/environment/case-studies/where-is-your-used-mobile-phone
mobile phone total 5.22 355.5M mobile phones produced China 2009 http://news.softpedia.com/news/Half-The-World-039-s-Mobile-Phones-Made-In-China-52014.shtml
0.069 per netbook
Total Netbooks 1.10 32.8M total http://lowendmac.com/ed/fox/09ff/netbook-market-too-small.html
Per Automobile 17 http://resources.schoolscience.co.uk/CDA/16plus/sustainability/copper5.html
Total Automotive 238
per television 5
Televison 300 est 60 M tvs Produced China http://factsanddetails.com/china.php?itemid=357&catid=9&subcatid=61
Total: 6,887.50

Actual Consumption China 2011 Est 7300


Total World Production 16,400.00

5 comments:

Juan said...

what are your conclusions based on your numbers?

how much would the china's copper consumption would increase from 2011 to 2015?
what about other metals such as aluminum
and what about iron?

Randy Kirk said...

I actually have an analysis of iron ore in China here: (well for Steel, but over 98% of iron ore is used in steel): http://pt.scribd.com/doc/52420493/Stunning-Chinese-Steel-Consumption-Numbers

Iron ore consumption also appears to be driven by construction in China.

One should analyze residential and office construction numbers in China to judge future copper consumption -- also iron ore consumption. The level of construction in China is astounding. CHina is building the equivalent of more than 1000 world trade centers per year, every year, at the current rate. If consumption is to continue at these levels, new buildings will have to be built at a similar rate going forward.

In after 10 years, India should pick up some of the slack in iron and copper consumption, as India industrializes, the question is if China can continue to build at a similar rate -- I don~t know this yet, I am currently researching this.

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