ARTICLE IN PRESS

Resources Policy 34 (2009) 161–175

Contents lists available at ScienceDirect

Resources Policy

0301-42

doi:10.1

� Corr

E-m

Peter.Bu

Markus

journal homepage: www.elsevier.com/locate/resourpol

Assessing the long-term supply risks for mineral raw materials—a combinedevaluation of past and future trends

Dirk Rosenau-Tornow a, Peter Buchholz b,�, Axel Riemann a, Markus Wagner b

a Volkswagen AG, Group Research, Environmental Affairs Product, Letter Box 1774, 38436 Wolfsburg, Germanyb Federal Institute for Geosciences and Natural Resources (BGR), Section Mineral Economics, Stilleweg 2, 30655 Hannover, Germany

a r t i c l e i n f o

Article history:

Received 14 January 2008

Received in revised form

16 June 2009

Accepted 6 July 2009

Keywords:

Automobile industry

Copper

Indicators

Market analysis

Mining

Procurement

Raw material

Mineral resources

Resource management

Risk mitigation

Supply risk

Supply and demand

Security of supply

07/$ - see front matter & 2009 Elsevier Ltd. A

016/j.resourpol.2009.07.001

esponding author. Tel.: +49 511643 2518; fax

ail addresses: Dirk.Rosenau-Tornow@volkswa

chholz@bgr.de (P. Buchholz), Axel.Riemann@

.Wagner@bgr.de (M. Wagner).

a b s t r a c t

This paper develops a method for identifying and assessing long-term supply risks for mineral raw

materials. The method is based on a combined evaluation of past and future supply and demand trends.

By analysing raw material boom and bust cycles over the past 50 years, we have quantified indicators

and defined benchmarks for identifying critical market situations. By applying the method, risks for

supply shortage may be identified at an early stage. In addition, a numerical evaluation model has been

developed for better comparison between various mineral raw materials. Compared to other

assessment methods this method uses specific benchmarks for each raw material to better assess

supply risks. The method is embedded within a systematic and comprehensive analytical approach.

Based on this model, companies can make better informed decisions for their market assessment

and may use suitable risk mitigation instruments to counteract problematic developments.

Understanding future supply conditions is especially useful when selecting new technologies for

products which require an intensive use of raw materials. As an example, the method is applied to the

copper market as of 2006.

It is important to emphasise that nobody can foresee the future of raw material prices. But we may

aim to better understand the weaknesses of these markets which may lead to future supply shortages

thus influencing price.

& 2009 Elsevier Ltd. All rights reserved.

Introduction

Supply and demand analyses for mineral raw material marketsare widely used by public authorities, the banking sector, miningand consulting companies or manufacturers. Each of them use adifferent set of parameters to describe market developments—

and they come to different and often wrong conclusions.One of the official US reviews of the resource situation in the

early 1950s was conducted by a commission appointed byPresident Truman, called The President’s Materials Policy Com-mission, organized in response to fears of raw-material shortages.It came to be known as the Paley Commission. Its reportquestioned whether ‘‘the United States of America has thematerial means to sustain its civilization’’ and gave specificrecommendations on how the increasing supply of materialscould best be assured. (Paley Commission, 1952). The Club ofRome report of 1972 (Meadows et al., 1972) constructed scenarios

ll rights reserved.

: +49 511643 3661.

gen.de (D. Rosenau-Tornow),

volkswagen.de (A. Riemann),

for the future that found exhaustion of resources at various dates,most of which have come and gone without the immediateconsequences of societal or economic collapse they envisioned.The Paley Commission as well as the Club of Rome under-estimated the mineral wealth of our globe and humans0 force toinvent new technologies for extracting and for using theseminerals. With the beginning of the 21st century and the Chinesegrowth in demand causing historic price hikes and deliveryshortages the discussion about the finiteness of mineral resourcesis back on the table.

With the possible exception of conventional oil, mineral rawmaterials in general are not short. Just by the fact that our planetis large enough and only to a minimum explored, it still bearsmany hidden mineral deposits. This however does not mean thatwe should use our resources imprudently. It is not the finitenessbut the criticality of a sustainable supply which is an importantissue to our economies. For this reason, the Committee on CriticalMineral Impacts on the US Economy has recently published anexperts report on critical minerals to the US with the aim to aiddecision makers in taking steps to avoid restrictions in mineralsupply (Committee on Critical Mineral Impacts of the USEconomy, 2008). In November 2008, the European Commission

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D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175162

has announced to define critical raw materials to the EuropeanUnion in its new Raw Materials Initiative as well (EuropeanCommission, 2008).

For a similar reason, the Volkswagen AG and the FederalInstitute for Geosciences and Natural Resources (BGR) havedeveloped a method for identifying and assessing long-termsupply risks for mineral raw materials. For manufacturers, allcurrently used raw materials of the value chain are critical for theproduction. In a joint research project we have decided to quantifyindicators and define benchmarks to help recognising criticalmarket situations. This method can help to better assess futuredevelopments in raw material markets and thus helps companiesto make better informed decisions, to react in good time and toimplement measures ensuring supply. Understanding futuresupply and demand trends is especially useful when selectingnew technologies for products which require an intensive use ofraw materials.

Today we are able to look back to developments at least overthe past 50 years. The experience we made over these decadescombined with decent databases makes us confident to be able toquantify early warning indicators based on identified criticalsupply situations from the past. In this study we present asystematic approach to evaluate mineral raw material markets,including time series analyses and a numerical evaluation model.Integrating such market indicators into a systematic set ofmanageable analytical instruments is a challenge and a prerequi-site for a balanced judgment of future market trends.

Review of market instability and metal prices

Raw material prices are subject to economic cycles, also knownas ‘‘hog cycles’’. To put it simply: given a sudden increase indemand, the existing supply cannot meet the demand fast enoughand prices rise, especially when the demand is inelastic. For manyvalue chains, demand for raw materials tends to be very inelasticwith respect to price changes in the short run; users of metalssuch as fabricators and manufacturers have limited ability toadjust their production levels and production equipment quickly.So they have to accept high prices. When prices keep high duringan economic boom more investments are made in raw materialexploration. However, their effect is delayed due to the high leadtime for mining projects between five and ten years. At the end of

Fig. 1. Long-term price fluctuations for metallic raw materials and global

economic events. The red line indicates the average price index level (CRB metals

sub-index for a basket consisting of prices for scrap copper, steel and lead, as well

as zinc and tin; 1967 ¼ 100, Data Source: Commodity Research Bureau, 2006).

such an economic boom period, recently released through thecollapse of the financial markets, there is a surplus of rawmaterials and a drop in prices. This in turn leads to shut-downsand therefore to a reduction in supply, and the ‘‘hog cycle’’restarts. Cyclical fluctuations in demand, supply and prices makeit difficult to reliably plan the procurement of raw materials,especially as the amplitude of cycles is almost impossible topredict.

Looking at the long-term development of metal prices, asillustrated by the CRB metals sub-index, not only the cyclicalnature of the markets, but also abrupt changes which often haveoccurred in the past are eminent1 (Fig. 1). Between the World WarII and 1973, the CRB metals sub-index always tended to liebetween 50 and 150 points. In the early seventies a series ofevents caused nominal prices for raw materials to risesignificantly; since then it has never fallen below the 150 mark.In 1973 the OPEC oil embargo, the end of the Bretton-Woodssystem of fixed exchange rates and the abandoning of the goldstandard as well as the Vietnam conflict led to a market situationwhich – additionally driven by the spirit of the Club of Rome –raised the price of raw materials to the levels of between 150 and350 points until 2003. However, in real terms, prices have fallencontinuously until 2003. With the China factor, we have entered anew aera. The extent to which the current high raw materialsprices represent a permanent departure from the old pricestructure is almost impossible to predict at present.

In the past, the raw materials market was reshaped by militaryactions, as well as by global political and economic changes oftoday’s industrialised countries. The current demand in emergingnations for raw materials is of comparable economic importanceto those past events and cycles. Once the current financial andeconomic crisis is overcome, demand will pick up again and thenext cycle starts. This means that the evaluation of mineral rawmaterial markets and supply and demand mechanisms willremain important.

Systematics of supply and demand analyses

In 1929, Hewett identified four factors he deemed mostimportant in influencing metal supply while reflecting on theeffects of war on metal production (Hewett, 1929; Brown, 2002).He distinguished between geology (geological factors related tothe minerals occurrence and problems of recovery), technology(technical factors of mining, treatment and refining), economy(highlighting cost and selling price), and politics. He alsorecognised that the four factors do not operate separately, butrather as parts of an integrated system including social constraintsand drivers such as environmental issues and the structure of themining industry.

Today, the factors described by Hewett are still the basicfundamentals to understand and analyse the supply side.However, since Hewett the world and the mineral markets havebecome more complex and the effects of environmental and socialaspects are increasingly important.

Comprehensive supply analyses done by investment banks orindependent market analysts consider production data, thedevelopment of stocks, production and investment costs, com-modity prices, freight capacities (rail, harbour, vessel), capacityincreases due to new exploration, mining and refinery projects,global reserves and resources, recycling, political and socialunrest, etc. (Citigroup, 2005; Deutsche Bank, 2008; World Bank,

1 For further discussion of mineral commodity cycles see IMF (2006), Radetzki

(2006) and World Bank (2008).

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D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175 163

2008). In their recent analysis, the Committee on Critical MineralImpacts on the US Economy has identified several risks to supply,namely: (i) unexpected increase in demand meeting a productionlevel at close capacity; (ii) small markets where productioncannot be increased quickly; (iii) high market concentration atmines, company or country scale; (iv) dependence of a by-productto the main product; and (v) availability of recycled material.

As mineral markets are demand driven, studies of the growthin demand should include the analysis of new technologiesinfluencing growth in demand, substitution, GDP, industrialproduction, population or migration into cities, regulatory orother public policy changes etc. (see Appendix 1 and methodsin Barney, 1980; Sohn, 2006; IMF, 2006). However, analyses ofsupply and demand are at least very imprecise as WassilyLeontief, 1973 Nobel laureate in economics, once commented:‘‘Regarding the projections, the only thing that I am certain aboutis that they are wrong’’.

For this reason, we aim to quantify whether a market will bebalanced within an overseeable future of five to fifteen yearsunder certain preconditions of growth in supply and demand andwhether other parameters such as political risk may affect supply.The strength of this study is to look back to the past 50 years, setbenchmarks for problematic market situations and by usingscenarios evaluate to what extend supply problems may raise infuture.

For evaluating the developments in supply we suggest tofollow a systematic procedure. Such a systematic approach isoften missing so that early alerts cannot be derived easily.Therefore we suggest to look at more technical aspects whichhave an immediate impact to supply: (i) the current marketbalance, stock-keeping, mining/refining capacity utilisation (andfreight capacity, e.g. for iron ore); (ii) costs in mining or shippingwhere relevant; (iii) geostrategic risks including country orpolitically related risk and concentration of production; (iv)execution of market power through company concentration; and(v) new exploration and mining projects, investment, and thereserves and resources situation.

Whereas the potential future production is fairly well pre-dictable within a time period of five to ten years (lead time forexploration and mining projects) the demand side is not. Whichnew technologies and innovations or political decisions willinfluence demand? When are new technologies ready for themarket? Which material intensive technologies will be substi-tuted by other, less material intensive technologies? When is thenext economic hausse or baisse coming? If we would have ananswer to these questions, most analysts would not sit any longerin their office but rather on a tropical island enjoying lots ofcocktails.

What seems to be legitimate is to take different demandscenarios and check whether supply is able to meet such demand.Historically, global demand for basic industrial metals has notchanged rapidly within a ten to fifty years time horizon (Frondelet al., 2007). Over these periods, the change in global demand wasone or two percent annually up or down (see also this study forcopper). As long as sudden technological revolutions or majorglobal economic changes are not in sight, global demand will notapart from these systematics. This is the basis for our evaluationof the demand side.

As innovation cycles are developing more rapidly, newrevolutionary technologies in exploration and mining as well ason the demand side will rise. Such technologies are to beintegrated into scenarios of supply and demand. A good foresightstudy of demand driven by future technologies has recently beenpublished for a broad range of industrial sectors (Angerer et al.,2009). The study, commissioned and funded by the GermanFederal Ministry of Economics and Technology, gives an overview

about the possible future raw materials demand of around onehundred future technologies and its market impact.

Especially the automotive sector is facing challenging times indeveloping environment and consumer friendly cars. The avail-ability of mineral raw materials is fundamental to this sector alsowith respect to forthcoming changes in technology.

Methodical basics

Relevance analysis and data

Assessing the possible risk of supply shortages for mineral rawmaterials is based on a number of fundamental factors. Thesefactors may however differ from one raw material to the other. Athematic list comprising the most important factors influencingthe long-term supply and demand has thus been compiled (Step 1,Appendix 1). For each raw material under consideration, therelevant factors may be selected from this list. For example, therelatively low shipping costs as a percentage share of deliveredprices to buyers are low for copper or tungsten. Thereforeshipping price and port and see freight capacities only play aminor role in the assessment of this market.

One major constraint in the assessment is the availability ofstatistics. Our analyses are based on the evaluation of historictrends and developments compared with current market trends.Therefore, the availability of data series over a long period of timeis essential (for example 1960–2005 in this study). For this, BGRpossesses both its own statistical database and archives as well asselected commercial databases on: raw material production andconsumption, new exploration and mining projects, raw materialprices, production and freight costs, exploration and capitalexpenditure in the mining sector or country risks data. However,global statistics for some raw materials are unreliable or onlyavailable for a limited period of time.

Developing the indicators and benchmarks

Based on available data and factors selected in Step 1 we haveformulated and calculated a set of indicators which we think aremost important for analysing the supply risk. A main indicatorusually combines several factors applied over a certain period oftime (Step 2, Table 1). The method is also open for adding furtherindicators.

How do we recognise that the market may become imbal-anced? To answer this question, we need to understand where westay today. For this reason we review and evaluate past markettrends and derive maximum and minimum values (benchmarks)for each indicator corresponding to problematic or relaxed marketsituations of the past. We then compare these developed bench-marks with current market trends and may thus concludewhether the supply risk may increase or decrease. As with otherlearning curves the developed benchmarks may have to bereadjusted after some period of time. For each raw materialunder consideration the developed benchmarks are different.To better compare the supply risk among various raw materials,the results for each indicator are normalised on a scale from 1 to 9,subdivided into a ‘‘relaxed’’ (values 1–3), ‘‘moderate’’ (values 4–6)or ‘‘problematic’’ (values 7–9) market situation. A review of allindicators finally points to the major risks – labled 7–9 – affectingsecurity of supply (e.g. applied for complex metal compositions innew technologies). By using this method, analysts are able to usequantifiable data for their market outlook based on profoundknowledge of the past.

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Table 1Indicators for the assessment of supply risks, rating scale with benchmarks and summary of rated results for the copper market.

Indicators for market assessment

Indicator Situation in 2004 and trend Evaluation

1 2 3 4 5 6 7 8 9

1. Current supply and demand

Current market balance (Mb)

MbiDt ¼ Pi�DSi�Coni

Mc ¼ 83,000 tonnes; trend problematic.Difference in production (P),

change in stocks (DS) and consumption (Con).

moderate problematicrelaxed

1000 tonnes100 -100

Stock keeping (Sk) SkiDt ¼ ((Si�100)/

RP�DSi)

Sk ¼ 3.3%; trend problematic, Ratio of global stocks (S) and refinery

production (RP).

moderate problematicrelaxed

15 10 %

Mine (Mcu) or refinery (Rcu) capacity

utilisation McuiDt ¼ ((MPi�100)/Mci)

RcuiDt ¼ ((RCconi� )/Rci)

Mine capacity utilisation (red) ¼ 92%, refinery capacity utilisation

(blue) ¼ 85%.Ratio of mine production (MP) and mine capacity (Mc) or

refined metal consumption (RCon) to refinery capacity (Rc).moderaterelaxed

85 %90

Refinery products1 Mine products

problematic

2. Production costs

‘‘Cash costs’’ (CC) CCiDt ¼ US$/lbi CC ¼ 0.45 US$/lb; trend moderate (2005: 0.46 US$/lb), cash costs (CC)

per pound (lb) of raw material produced0.6

moderaterelaxed

US$/lb0.5

problematic

3. Geostrategic risks

Country related risk (Cr)

Cr ¼P

n ¼ 1x Pcountries�GWB

Cr mine production ¼ 5.6, Cr refinery production ¼ 6.7.Sum of global

raw materials production (P, in % for each country) weighted with the

Governance index (G) of the World Bank (WB) for each country. 1,000 2,000

Refineryproducts Mine products

moderaterelaxed

7.0 6.0 5.5 4.5 4.0 3.0

problematic

Country concentration (HHICc)

HHICc ¼P

n ¼ 1x aiCPi

2

HHI mine production ¼ 1670, HHI refinery production ¼ 780,

Herfindahl–Hirschman Index (HHI): sum of squared values of raw

materials production (in %) in each country (aiCP)1,000 2,000

Refinery products Mine products

moderaterelaxed problematic

4. Market power

Company concentration (HHIF)

HHICompc ¼P

n ¼ 1x aiCompP2

HHI mining companies ¼ 442, HHI refineries ¼ 375,

Herfindahl–Hirschman Index (HHI): sum of squared values of raw

materials production (in %) of each company (aiComP) 1,000 2,000

Refinery products

Mine products

moderaterelaxed problematic

5. Supply and demand trends

Future market capacity (McF) in 2010

McFit ¼ ((Mpit+APciDtF)�100)/MPFnit at x%

growth of demand/year)�100

McF ¼ �3.2% (at 4% growth of demand).Possible compensation through

mine expansions.Ratio of mine production plus additional annual

production capacity (MP+APcF) of future projects and necessary future

mine production (MPFn) at a forecasted growth in demand for mining

products of x%/year.

0 %+10at 2 % growth of demand at 4 % growth of demand

moderaterelaxed problematic

Degree of exploration LtiDt ¼ Ri/MPi;

IExiDt ¼ ExBi/MPi

Lt ¼ 31 years, IEx ¼ 34.4 US$/tonne (last 5 years).Weighted values of

static life time (Lt) and investments in exploration (IE). Lt is the ratio of

reserves (R) and mine production (MP). IE is the exploration budget

(ExB) for each tonne of mine production.

45 25

moderate problematicrelaxed

Years

US$/tonne40

moderate problematicrelaxed

50

2004: 55 US$/tonne

Investment in mining (IM) (1998–2002)

IMiDt ¼ CapCi/Mpi

IM ¼ 128 US$/tonne (2002), IM ¼ 215 US$/tonne (1998– 2002).Ratio of

capital costs (CapC) for new mining projects and mine production.200

moderate problematicrelaxed

US$/tonneMine products300

2002 = 128Ø 1998-2002

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175164

For example: taking the main indicator (1) (supply and demand,Fig. 2), the factors production (P), changes in reported stock-keeping(DSk) and consumption (C) are used to calculate the indicator‘‘market balance’’ (Step 1, see Fig. 4). The ‘‘market balance’’ indicator(Mb) of the raw material (i) is calculated over a specific time period(Dt). Using the time period 1960–2004, the benchmarks for copper7100,000 tonnes are labeled moderate. Due to the sharp reductionof stocks on the metal exchanges and at producer0s warehouses, themarket coverage for copper in 2004 was +80,000 tonnes includingthe movement in reported stocks (moderate; problematic excluding

movement in reported stocks). Due to the low stocks of copper andcontinued high demand, the trend for the future market balance isproblematic. This is clearly underlined by a second indicator, ‘‘stock-keeping’’ (Sk, blue line), which in comparison to 1975, shows amuch lower ratio of copper stocks to annual refinery production(1975: 21.4%, ‘‘relaxed’’; 2004: 3.3%, ‘‘problematic’’, benchmark forrelaxed/problematic is defined at 10%). A further indicator evaluatesthe utilisation of mines and refineries. Together, the three indicators‘‘market balance’’, ‘‘stock-keeping’’, and ‘‘refinery/mine utilisation’’define the main indicator (1). The additional main indicators

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2+ 8++

-

7

7

2**

4**

3

7**

9

4

7

Copper

Degree of exploration (2004+; 2000-2004++)

Investments

Market balance in 5 years time(at 4% demand growth per year)

5. Supply and demand trends (average)

4. Market power

3. Geostrategic risks (country concentration, country risk)

Cash operating costs

2. Production costs

Refinery*/mine utilisation**

Stock keeping

Market balance

1. Supply and demand (average)

Rating

0123456789

1

2

34

5

* Mine products, **refineryproducts

Rating scale

1 2 3 4 5 6 7 8 9

moderaterelaxed problematic

Fig. 2. Summary of the evaluated and rated market situation for copper.

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175 165

production costs (2), geostrategic risks (3), and market power (4)further characterise the supply side.

Forecasts

The forecast for future supply and demand presented as mainindicator (5) is based on the analysis of: (i) the productioncapacity of mines currently under construction, expansion andproduction forecasts for exploration projects in grassroots, pre-feasibility and feasibility status; and (ii) the growth in demandbased on published market sector and economic data. Accordingto the supply and demand forecast, the balance may lead to theconclusion whether supply may sufficiently meet demand in fiveor fifteen years (Step 3).

In order to better estimate the extend of future exploration andmining activities, the development of the companies’ explorationbudgets and capital expenditure for mining projects are alsoconsidered. Estimating the demand comprises an extensiveliterature review of the global economic outlook including GDPand industrial production as well as growth foresight studies ofindustrial sectors and future technologies.

Simplified forecasts of this kind are always fraught withuncertainty. For this reason, the analysis should be adjusted atintervals of two to four years by continually checking the data athand.

Once the main indicators are calculated, rated and presented ina characteristic spider chart, the market situation can quickly beassessed (Fig. 2). The spider chart may be used for bettervisualisation of the results. The chart shows, whether and whichindicator (1–5) point to a ‘‘relaxed’’, ‘‘moderate’’ or ‘‘problematic’’market situation. The numbers on the chart correspond to thetabled indicators in Fig. 2.

As a result, suitable actions for companies may be recom-mended to ensure supplies of raw materials, for example bysigning long-term contracts, by hedging or by diversifying sourcesof supply.

Analysis for copper

Data situation

The statistical database for analysing the copper market isgenerally very good. This analysis used the following data sources,as of 2004–2005:

�

International Cooper Study Group (ICSG, 1960–2006; produc-tion, consumption, recycling, mine/refinery capacities) � World Bureau of Metal Statistics (WBMS, 1960–2006; produc-

tion, consumption, stocks, prices)

� British Geological Survey (1960–2005, production) � World Bank (country risk, economic data) � BGR database (combined statistical database on production

and consumption, annual production capacity from newmining and exploration projects, prices)

� Raw Materials Group (2005, mines and projects: annual

production capacity, production, mergers and acquisitions,reserves, resources, ore content)

� United States Geological Survey (USG, 1960–2005; reserves,

reserve base)

� Metals Economics Group (1988–2006 exploration budgets/

expenses, capital expenditures)

� Business reports from mining companies, market analyses, for

example from Citigroup (2005), Morgan Stanley (2004) (cashcosts, capital costs, growth forecasts, demand development)

The statistical data on global supply and demand for the periodfrom 1960 to 2005 is largely complete. However, worldwide datain exploration and capital expenditures as well as cash costs wereonly available since the early 1990s and are partially incomplete.

Price trends

Copper prices more than doubled between 2002 and 2005. Theannual average price rose from 1560 to 3680 USD/tonne, and

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0

2

4

6

8

10

12

1416

-10-8-6-4-20246810

IndonesiaAustraliaPeruUSAChileOthers

Min

e pr

oduc

tion

[mill

ion

tonn

es]

% G

row

th

1960 19851965 1970 1975 1980 1990 1995 2000

02468

10121416

-10-8-6-4-20246810

Ref

iner

y pr

oduc

tion

[mill

ion

tonn

es]

% G

row

th

RussiaUSAJapanPR ChinaChileOthers

1960 19851965 1970 1975 1980 1990 1995 2000

Fig. 3. Development of mine production (A), refinery production (B) and consumption of refined products (C) for copper by country, as well as mine and refinery utilisation

for copper (D) (Data Sources: World Bureau of Metal Statistics, International Copper Study Group).

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175166

reached record levels of over 8000 USD/tonne in 2006. Unexpect-edly high demand and the inability of supply to meet this demandin the short run led to both high prices and low stocks. Continuedlow stocks between 2004 and 2005 combined with expectationsfor high demand from Asia kept the market nervous and thusprices up. In addition, low total capital and exploration spendingrelative to the average between 1990 and 2002 as well as highmine utilisation and the effects of labour strikes to price are anindication that production levels are limited and cannot be raisedquickly. Low elasticity of demand is another effect pushing upprices since mid-2005.

Supply and demand

Market balance (rating: 4, moderate; trend: problematic)

Worldwide mine production for copper increased by 243%from 4.24 million tonnes in 1960 to 14.56 million tonnes in 2004at an average annual growth rate of 2.9%. Since 1995, the annualgrowth in global mine production has been significantly higher at4.3%. The two biggest producers – Chile and the USA – had sharesof global production of 37% and 8%, respectively in 2004 (Fig. 3A).Refinery production increased between 1960 and 2004 by 2.7%annually, accelerating to 3.5% after 1995, reaching a record level of15.58 million tonnes in 2004.

Throughout the period under consideration, the averagegrowth in consumption of refined copper was 3.0%. In China and

South Korea, the growth rates were 8.3% and 17.6%, but in theindustrialised countries, USA, Japan and Germany, they were onlybetween 2.1% and 4.1% (Fig. 3B). In the past ten years, the averageglobal annual growth in refined copper consumption was 3.6%,with China in first place with an average annual growth rate of12.8%. In industrialised countries, on the other hand, growth inrefined copper consumption was stagnant or – as in the case of theUSA and Japan – even fell slightly (Fig. 3C).

The calculated difference between refined copper productionand consumption shows that there were supply deficits at the endof the 1970s, 1980s and 1990s which – combined with strongdemand – resulted in price increases of more than 100% (e.g. atthe end of the 1980s) (Fig. 4). Some of this shortfall wascompensated using stock held by producers, suppliers andexchanges. As a result, these global stocks continued to shrink.From the mid 1990s a supply surplus accumulated again, causingthe price of copper to fall to almost the levels of the 1970s andearly 1980s and stocks to rise. Since 2003, due to increasingdemand, particularly from China, accumulated stocks have fallendramatically and at 517,000 tonnes in 2004, they were even lowerthan the level of 1987 (521,000 tonnes).

Overall, the market balance in 2004 was moderate. It waspossible to cover the large supply deficit of 612,000 by utilisingstocks, which meant that the market balance including move-ments in documented stocks was +83,000. In the meantime,the situation has become much worse. Looking at the marketbalance (including movements in stocks) over time, we have set

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02468

101214161820

-12-10-8-6-4-202468101214

Ref

ined

con

sum

ptio

n [m

illio

n to

nnes

]

% G

row

th

Korea Rep. (South)GermanyJapanUSAPR ChinaOthers

1960 19851965 1970 1975 1980 1990 1995 2000

%

70

75

80

85

90

95

100

1994

92%

85%

Refinery utilisationMine utilisation

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fig. 3. (Continued)

US

$ / t

onne

2004: 3.3%

1975: 21.4%

-800

-600

-400

-200

0

200

400

600

800

nominal

1,00

0 to

nnes

Sto

cks

/ ref

iner

y pr

oduc

tion

5

10

15

20

25%

0100020003000400050006000

real

productionRatio of stock to refinery

Surplus/ deficitSurplus/ deficitincl. Δstocks

1960 1980 20041965 1970 1975 1985 1990 1995 2000

Fig. 4. Development of supply and demand for copper: market coverage for refined copper, stock-keeping and price (Data Source: World Bureau of Metal Statistics,

International Copper Study Group).

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175 167

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D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175168

benchmarks between +100,000 and �100,000 tonnes. In thatrange, the market situation is considered as moderate. Levelsabove +100,000 tonnes are considered relaxed, levels below�100,000 tonnes are considered problematic.

Stock-keeping (rating: 9, problematic)

Due to the development described above, the stock-keepingsituation is evaluated as a serious cause for concern. In 1975stocks amounted to around 21.4% of refinery production, and by1985 this value declined to around 10%. Between 1986 and 2003the value ranged between 5% and 10%. Since then it has fallen to aproblematic 3.3% (Fig. 4). In order to quantify the supply risk, thestock-keeping is considered here as moderate when stocksamount to around 10–15% of refinery production. If stocks arebelow 10% of refinery production for a period of more than oneyear, there seem to be serious problems to keep up supply.Although this indicator is more appropriate for understanding thecurrent situation and to describe short-term risks, strategic stockplanning by governments such as in the USA and more recently inChina may influence the market in the longer run. Selling ofnational stocks may act as a buffer in tight markets, buying maymasquerade demand and may support prices in a falling market.

Mine/refinery capacity utilisation (rating: 7, problematic; trend:

problematic)

In comparison with the relatively low refinery capacityutilisation (2004: 85%), mine capacity utilisation in the past tenyears has been relatively high, between around 90% and 94% (Fig.3D). Mines were not able to increase production according to theincreasing demand. Minor production losses, such as strikes in

0.00

0.10

0.20

0.30

0.40

0.50

0.60 Average: 0.45 US$ / lb

Cas

h co

sts

[US

$/lb

]

n/a

1994 1996 1998 2000 2002 2004

Fig. 5. Development of cash costs for copper mining projects (Data Source: Metals

Economics Group).

Table 2Geostrategic risk for global copper mine production including country concentration a

Country 1994 (1000 t) % HHI 1994 2004 (1000 t) %

Chile 2219.9 23.4 545.85 5412.5 37.2

USA 1813.0 19.1 364.09 1174.0 8.1

Peru 395.9 4.2 17.36 1035.6 7.1

Australia 418.0 4.4 19.35 854.1 5.9

Indonesia 309.7 3.3 10.63 843.2 5.8

Russia 573.3 6.0 36.41 745.0 5.1

PR China 395.6 4.2 17.34 607.5 4.2

Canada 590.8 6.2 38.66 563.4 3.9

Poland 378.2 4.0 15.84 530.5 3.6

Kazakhstan 218.8 2.3 5.30 461.8 3.2

Others 2188.3 23.0 44.24 2334.4 16.0

Total 9501.6 100 1115.1 14562.0 100

Data Sources: World Bank (2005), World Bureau of Metal Statistics (1960–2006).

WB ¼World Bank, the WB scale of country risk rating from �2.5 to +2.5 has bee

Herfindahl–Hirschman Index (HHI) ¼ country concentration; weighted country risk = s

Asarco or Codelco mines or through missing deliveries of spareparts (truck tyres) additionally destabilised the market. Looking atthe historic development, a capacity utilisation of 490% may thusbe defined as problematic.

Production costs

Cash costs (rating: 3, relaxed)

Between 1994 and 2005, cash costs for planned copperproduction from projects in feasibility status or under construc-tion lay between 0.37 and 0.50 USD/lb. In 2005, with a value of0.46 USD/lb, they were just above the average 0.45 USD/lb (Fig. 5).This information is based on an analysis of project data from over177 flotation and SX-EW (Solvent Extraction, SX-EW) operationssince 1994 (Metals Economics Group).

Between 1994 and 2005 there was no clear trend regardingrising or falling average cash costs, so the situation is currentlyevaluated as relaxed. If the average cash costs increase to a levelabove about 0.6 US$/lb over some period, the situation may betermed problematic with respect to possible long term priceescalations. In real terms, cash costs have fallen at an almostconstant rate since 1980. However, between 2005 and 2007 costsalso in real terms have increased significantly. Some companieshave registered rises in costs, which means that cash costs shouldbe monitored in the long term. Phelps Dodge reported rises incosts of around 25% for maintenance and service, 23% for energy,18% for processing and freight, 17% for equipment and 15% forpersonnel (International Mining, 2006; see also Tulpule, 2008).Codelco also announced a total increase in operating costs of 20%for 2005 (Codelco, 2006).

Continuing rationalisation and increased efficiency incopper mining, for example through increasing the amount of insitu and heap leaching (solvent extraction methods), increasedautomation in open-cast mines and the use of more efficient,energy-saving mills (high pressure grinding rolls), makes itforeseeable that despite certain cost increases, worldwide operat-ing real costs per tonne of ore mined may tend to fall or remainthe same.

Geostrategic risks

Country concentration and country risks (rating: 4, relaxed; trend:

relaxed)

In order to quantify the country concentrations with theHerfindahl–Hirschman Index (HHI), this study defines scoresbetween 1000 and 2000 as benchmarks for moderate

nd weighted country risk.

HHI 2004 Country related risk WB 2004 Weighted country risk 2004

1381.50 7.32 2.72

65.00 8.22 0.66

50.57 4.46 0.32

34.40 8.34 0.49

33.53 4.34 0.25

26.17 3.74 0.19

17.41 4.50 0.19

14.97 8.25 0.32

13.27 6.20 0.23

10.06 3.76 0.12

23.66 – 0.02

1670.5 – 5.6

n converted to a scale of 1–10; % values ¼ percent of world mine production;

um of share of production � country related risk.

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supply risk (the US Department of Justice and Federal TradeCommission (1997) uses values between 1000 and 1800), scoresabove 2000 as problematic, and scores below 1000 as relaxed. Inrelation to the standardised World Bank scale for country risks(World Bank, 2005, values of �2.5 to +2.5 converted to a scalefrom 1 to 10), countries with a country risk between 4.5 and 5.5are evaluated as benchmarks for moderate supply risk. Valuesbelow 4.5 are classified as problematic, and values above 5.5 asrelaxed.

With a Herfindahl–Hirschman Index (HHI) of 1670 for copper,the country concentration for mine production has significantlyincreased compared to 1994 (Table 2, rating: 6). Since the increasedcountry concentration for mine production is largely caused bythe share accounted for by Chile, which has a low countryrisk (5.6, rating: 3), the geostrategic risk for mine productionis evaluated at 4.5 (moderate). Because, according to this

1994Corporacion Nacional del Cobre de

Chile, 12 %

RTZ Corporation, 7 %

Phelps Dodge, 6 %

BHP, 5 %

Asarco, 4 %

KGHM Polska Miedz, 4 %Freeport McMoran, 3 %

Cyprus Amax Minerals, 3 %

Norilsk Mining & Metallurgica, 3 %

Magma Copper, 3 %

Othercompanies

50 %

Herfindahl-Hirschman Index (HHI) of the2004: 398; HHI world = 442; 1994: 314;

1994Corporacion Nacional del Cobre deChile, 9 %

PhelpsDodge6 %

Asarco5 %

VR China4 %Noranda, 4 %

KGHM Polska Miedz, 4 %

Magma Copper, 3 %

Norilsk Mining & Metallurgical, 3 %

MIM Holdings, 3 %

Union Minière, 3 %

Othercompanies,

56 %

Herfindahl-Hirschman Index (HHI) of th2004: 307; HHI world = 375; 1994: 229

Fig. 6. Company concentration in copper mining (A) and copper refineries (B), compariso

Materials Group, World Bureau of Metal Statistics).

principle, the geostrategic risk for refinery production isevaluated at 2.0 (relaxed, not shown), the overall result is amoderate geostrategic risk for copper mine and refinery productionworldwide.

Market power/company concentration

Company concentration (rating: 2, relaxed)

The exertion of market power through global companyconcentration for mine and refinery production is evaluatedoverall as relaxed, since in each case the HHI lies well below 1000(Fig. 6A and B). Thus, with regard to competition, the supplierbase can be classified as diversified. In order to quantify thecompany concentration using the HHI, the scale applies similarlyto the country concentration.

2004Corporacion Nacional del Cobre de

Chile, 13 %

BHP Billiton, 7 %

Phelps Dodge, 7 %

Grupo Mexico, 6 %

Rio Tinto, 5 %

Anglo American, 5 %

KGHM Polska Miedz, 4 %

Noranda, 3 %Freeport McMoran

Copper & Gold3 %

Antofagasta3 %

Othercompanies

44 %

10 largest mining companies: HHI world = 379

2004Corporacion Nacional del Cobre de

Chile, 10 %

VR China, 10 %

Phelps Dodge, 6 %

Grupo Mexico, 5 %

Nippon Mining, 4 %

KGHM Polska Miedz, 3 %Noranda, 3 %

Norddeutsche Affinerie, 3 %

Mitsubishi Materials, 3 % Norilsk Nickel, 3 %

Othercompanies

50 %

e 10 largest refining companies; HHI world = 299

n between 1994 and 2004 (HHI ¼ Herfindahl–Hirschman Index, Data Sources: Raw

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D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175170

Supply and demand trends/forecast

Static life time of reserves and resources (rating: 5, relaxed)

From a purely geological view, the long-term situationregarding reserves and reserve base for copper can be termed asrelaxed (see USGS, 1980 for definition). The largest reserve base inthe world, amounting to 39%, lies in Chile (Fig. 7A). Due tosuccessful exploration activities in the last 40 years, the static lifetime for global copper reserves and resources was maintained forbetween 40 and 60 years, respectively (Fig. 7B). However, sincethe early nineties, the reserve range has fallen from around 40 to20 years. Since 2002, with the beginning of the bull market andrenascent international exploration activities. In 2004 it laybetween around 31 years for reserves (408 million tonnes) and64 years for the reserve base (940 million tonnes; Table 2). Valuesbetween 25 and 45 years may be used as a benchmark for amoderate situation. If the static life time of reserves falls below 25years, exploration activities should thus be monitored regularly.The static life time of reserve and resource is a function ofexploration activities, and are therefore not an absolute measureof the shortage of a raw material (see Wellmer, 1998). For thisreason, the degree of exploration needs to be estimated.

Degree of exploration (for 2000–2004, rating: 6.5, moderate; for 2004

rating: 2, relaxed, trend relaxed)

Because the life time of reserves and resources is not a measureof shortage, it is necessary to consider annual exploration costs

Ind

Chile140; 30%

USA35; 8%

Indonesia; 35; 8%Peru; 30; 7%

Poland; 30; 7%

Mexico27; 6%

PR China26; 6%

Australia24; 5%

Russia20; 4%

Zambia19; 4%

Othercountries67; 15%

2004 Reserves, million tonnes; %

Sta

tic li

fe ti

me

ofre

serv

es, r

eser

veba

se [y

ears

]

0

20

40

60 Reserve base

1960 1965 1970 1975 1980 1

19

Wor

ld m

ine

prod

uctio

n[M

illio

n to

nnes

Cu]

2

4

6

8

10

12

14

16

1960: 4,242 million tonnes of Cu

Fig. 7. Distribution of worldwide reserves and reserve base (A) (reserve base ¼ reserve

Sources: World Bureau of Metal Statistics, USGS).

and budgets in the mining sector. The indicator ‘‘degree ofexploration’’ weights the life time (for copper, rating: 5) and thetotal amount of the exploration expenditures or budgets of miningand exploration companies in relation to global mine production(for copper, rating: 8). For the time period 2000–2004, the totalrating of 6.5 for copper indicates that the market situation ismoderate to problematic. The exploration budget for copper issignificantly below the average of the last ten years (Fig. 8A).Between 1997 and 2002, exploration expenditures per tonne ofcopper extracted worldwide fell from over 65 USD/tonne to justover 20 USD/tonne which is significantly below the average valueof 42 USD/tonne for the period 1994–2005. Because companies’exploration expenditures were rising again since 2004, a positivetrend is emerging regarding the possible discovery of new minelocations, which – supposed to be successful – in the long-termwill lead to an increase or stabilisation of the life time of reservesand resources.

Investments (for 1998–2002, rating: 6, moderate)

Between 1990 and 2002 the trend for capital expenditures fornew copper mines was similar to the development of theexploration costs (Fig. 8B). Per tonne of copper extracted world-wide, investments fell from 491 USD/tonne in 1997 tothe problematic level of 128 USD/tonne in 2002. In 2002 theywere significantly below the average of 250 USD/tonne. Data forthe period after 2002 were not available, but it can be assumedthat capital expenditure for new copper mines since 2003

Chile360; 39%

USA; 70; 7%VR China; 63; 7%

Peru; 60; 6%Poland; 48; 5%

Australia43; 5%

Mexico; 40; 4%

onesia; 38; 4%

Zambia; 35; 4%Russia; 30; 3%

Othercountries150; 16%

2004 Reserve base, million tonnes; %

Reserves

985 1990 1995 2000 2004

87: 39 years2004: 31 years

2004: 14,562 million tonnes of Cu

s plus part of resources, USGS, 2005) as well as static life time (B) for copper (Data

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D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175 171

has increased significantly. In the next few years theypresumably will be well above 250 USD/tonne of copper extractedworldwide.

0

200

400

600

800

1994 1996 1998 2000 2002 2004

1990 1992 1994 1996 1998 2002

1994 1996 1998 2000 2002 2004Y

ears

or

US

$ / t

onne

Exp

lora

tion

expe

nditu

re[m

illio

n U

S$]

Average:42 US$/tonne extraction

0

20

40

60

Exploration expenditure US$ / tonne extractedExploration expenditure [million US$]

Static life time [years]

01.0002.0003.0004.0005.0006.000

Cap

ital c

osts

[mill

ion

US

$]C

u pr

ice

[US

$]

0100200300400500600

Cap

ital c

osts

[US

$ / t

onne

ext

ract

ed]

Average:250 US$/tonneextracted

Capital costs of Cuprojects [million US$]

Cu price[US$]

Capital costs [US$]per tonne extracted

Fig. 8. Development of exploration expenditure for copper (A) and investments

(capital expenditure) for copper projects (B) (Data Source: Metals Economics

Group).

Table 3Summary of worldwide reserves and resources for copper of operating mines, extensio

Status Ore resources (Mio. t)

Under construction 9,100

Feasibility 28,259

Pre-feasibility 11,191

Grassroots 31,974

Sub total 80,523

Operating mines 43,413

Mine extensions 63,611

Total 187,548Number of deposits

Data Sources: BGR database, Raw Materials Group, USGS (2005), �USGS reserve base; �

Table 4Summary of potential additional annual production capacity for copper from mine ext

market until 2010 and after.

Status Current mine extensions 1000 t/year

Mine extensions 1,175

Under construction

Feasibility

Pre-feasibility

Grassroots

Total 1,175Number of deposits (2005) 28

Data Sources: Raw Materials Group November (2005), BGR database.

Market balance in 5 years (rating: 7, problematic)

The total expected additional annual production capacity frommines under construction, projects in pre-feasibility and feasi-bility status reveal an additional estimated copper supply of 3.2million tonnes for the period 2005–2010 (Table 3). This assumesthat all 40 recorded projects starting within that period willactually come into production at the level of announced annualproduction capacity (see Tables 4 and 5). With an annual growthof 4% in worldwide demand for mined copper (average demand inthe past 10 years: 3.9%), and taking the expected production fornew projects into account, a worldwide copper deficit of 3.2%would remain in 2010 (Fig. 9A). However, since these estimates donot include mine expansions, it is not clear how well this potentialdeficit will be met. According to cautious estimates, currentoperating expansions lie at 1.175 million tonnes annualproduction capacity (Table 3). Roughly half of this would besufficient to cover this deficit.

Assuming a time period of 6–15 years (including allprojects with a published start of annual production capacityafter 6 years or undefined date), annual growth in refined copperconsumption and mine production of around 3% (average demandover the past 44 years for both: 3.0% and 2.9%, respectively), andtaking the expected production for new projects into account (6.5million tonnes), a speculative worldwide copper deficit of9.8% would persist until 2020 (Fig. 9B). Here again, mineexpansions are not considered. On top of that, the possible startof production of 222 recorded projects at an early explorationstage is not included in this estimate. These projects plus today’sstill undiscovered deposits could entirely offset the calculateddeficit.

Developments in the demand are difficult to predict. It isunclear whether the growth curve will take a similar path tothat of the past 44 years. In the long run, copper demandwill continue to be dominated by the building sector, mechanicaland electrical engineering, the automotive industry andprecision engineering. There will be significant demand for copper

ns, mines under construction, and deposits under exploration.

Cu content resources (Mio. t) Cu content reserves (Mio. t)

52 17

181 64

78 12

196

507 93

230 148

422 167

1,159 (940*) 408 (470**)439 186

�USGS reserves.

ensions, mines under construction, and new exploration projects available to the

Additional up to 2010 1000 t/year Additional after 2010 1000 t/year

705

1,318 1,483

1,265 757

988

3,288 3,22840 42

ARTICLE IN PRESS

Table 5Summary of the 25 largest copper projects in pre-feasibility and feasibility status with a planned annual capacity over 80,000 tonnes, project costs and expected start of

production.

Project Company Country Status OP/UG Expected annual

capacity 1000 t

Project costs

Million US$

Expected start

of production

Toromocho Peru copper Peru Pre-feasibility OP 300 980 After 2010

Petaquilla Petaquilla miner, inmet Panama Feasibility OP 230 1124 After 2010

Rio Blanco Monterrico Peru Feasibility OP 220 915 2009

Frieda River Highland pacific Papua New Guinea Pre-feasibility OP 220 After 2010

El Pachon Falconbridge Argentina Feasibility OP 200 1150 After 2010

Quellaveco Anglo American Peru Feasibility OP 200 840 2006

Salobo CVRD Brazil Feasibility OP 200 1055 2006

Hales Codelco Chile Pre-feasibility 190 2007

Mansa (MM) Codelco Chile Pre-feasibility OP 188 900 2008

Letpadaung Ivanhoe, State of Myanmar Myanmar Feasibility OP 155 389 2007

Lumwana Equinox, Phelps Dodge Zambia Feasibility OP 150 387 2007

Alemao CVRD, State of Brazil Brazil Pre-feasibility UG 150 550 2006

Gaby Sur Codelco Chile Pre-feasibility OP 150 550 2008

Agua Rica Northern Orion Argentina Feasibility OP 149 996 2009

Tampakan Indophil Philippines Pre-feasibility OP 140 700 2009

Udokan Summerset Hold, Chita

Regional Government

Russia Feasibility OP 130 700 2008

Antapacay BHP Billiton Gr Peru Pre-feasibility OP 120 230 2005

Haib Mine Namibia Copper Namibia Feasibility OP 115 500 After 2010

Esperanza Antofagasta, Equatorial Chile Pre-feasibility OP 110 550 2009

Safford Phelps Dodge USA Feasibility OP 110 450 2008

Cristalino CVRD Brazil Pre-feasibility OP 108 420 2005

Fortuna de Cobre Falconbridge Chile Feasibility OP 90 300 After 2010

Prominent Hill Oxiana Australia Pre-feasibility OP 90 407 2008

Golpu Harmony Papua New Guinea Pre-feasibility 80 2007

Sources: BGR database, Raw Materials Group, assessment date December (2005).

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175172

from the expansion of infrastructure in ambitious emergingcountries as well as sectors of engine development (e.g. hybridengines), smart house technology (e.g. building construction)and the introduction of energy-efficient technologies. In thetelecommunications sector, the possibility of substitution stillexists due to wireless data transfer, pipes and panels made fromplastic, or from the use of aluminium or superconductors inelectrical wires.

According to the past trends, an annual growth in copperdemand of 4% seems to be a realistic estimate. However, in thelong term, global recycling of copper could improve thus leadingto a much lower demand of primary copper production of rather2% (see Frondel et al., 2007 for comparison).

Overall rating

Due to strained market coverage, low stock-keeping and highmine utilisation, the overall supply conditions for 2004–2005 areevaluated as problematic (rating: 7). The development of produc-tion costs, geostrategic risks and the possibility of miningcompanies and refinery operators exerting their market powerto control prices are evaluated as moderate to relaxed. In contrast,supply and demand trends indicate that the market situation forcopper is problematic until 2010. Exploration and mining projectsshould therefore carefully be monitored.

Discussion and conclusions

Due to their limited accuracy, statistical data for mineral rawmaterials, which largely base on worldwide surveys, must betreated with caution. However, they may provide valuableinformation on future market developments and trends, espe-cially when data series exist for a long period of time and currentevents can be compared with past developments.

Despite those statistical uncertainties, there are furtherlimitations. For example, in order to estimate the country risks,the World Bank Group’s Governance index was used as a basis

(World Bank, 2005). As for most country risk classificationsdeveloped by banks and investment companies (e.g. Aon PoliticalRisk Services, 2006), the main focus is on the overall investmentand not on supply security. This means that the Governance indexcan, at best, only approximate the supply risk for raw materialsfrom a particular country. Here again, as for all other data,experience becomes part of the valuation process.

Estimating supply trends is full of uncertainty. The data for annualproduction capacity from new projects and the date of commence-ment are only target figures published by exploration and miningcompanies. By their very nature, planned mining projects may bepostponed or do not go further. Information on reserves andresources also change during the course of exploration. This meansthe status of projects must be updated regularly. Data on annualproduction capacity from mine expansions in the copper sector isalways difficult to evaluate. It is unclear to what extent they willreplace deceasing production from current mine sites or – in absoluteterms – add to new supply. Production information for mineextensions therefore is initially not included in the supply/demandbalance, but looked at for final evaluation of the market situation.

For all these reasons, supply/demand forecasts are of limitedvalue in absolute terms but may be very useful to identify markettrends and possible market failures. They are essentially based onapproximated scenarios over a period of 5 to 15 years, accom-panied by monitoring the degree of exploration, investment inmining projects, trends in production costs, geostrategic risks orchanges in market powers.

At present, the overall balance for supply and demand trendsdoes not take into account either future changes in the worldwidecopper recycling rate, or a detailed demand growth forecast. Thedemand growth scenarios are based on the assessment of existingmarket analyses for individual raw material sectors. The methodis thus open to further development and extension. Indicators forestimating the future demand of mineral raw materials haverecently been published (Frondel et al., 2007).

In spite of the uncertainties mentioned, the method describedhas some main advantages: a systematic market evaluation and

ARTICLE IN PRESS

* Not including planned mine expansions

Min

e pr

oduc

tion

[mill

ion

tonn

es C

u / y

ear]

2% growth in demand

4% growth in demand

2010201020040

2

4

6

8

10

12

14

16

18

20+8.1%

-3.2%

14.5616.39

18.4217.85 17.85

3.28 3.28

Necessary mine production at X% growth

Possible additional mine production/yearMine production in 2004 plus possibleadditional production/year from new projects*

Mine production in 2004

14.56

6.51 6.51

19.9923.36

21.0721.07

0

5

10

15

20

25

202020202004

2% growth in demand

3% growth in demand

+5.4% -9.8%

* Not including planned company expansions

Min

e pr

oduc

tion

[mill

ion

tonn

es C

u / y

ear]

Necessary mine production at X % growth

Possible additional mine production/yearMine production in 2004 plus possibleadditional production/year from new projects*

Mine production in 2004

Fig. 9. Forecast of future market coverage for copper up to 2010 (A) and 2020 (B) (A: production capacity of mines under construction and exploration projects in feasibility

and pre-feasibility status reported to come into production until 2010; B: all considered projects until 2010 plus feasibility, pre-feasibility and grassroots exploration

projects reported to come into production after 2010 or with indication of planned production capacity without year of commencement; operation expansions not included

in the calculation as they may partly substitute deceasing production of existing mines).

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175 173

assessment of supply risks using time series analysis ideally for along period of time, which allows comparison of the currentmarket situation with past market cycles; a clear scaling of manydifferent risk factors, which helps to quantify the supply risk;comparability of results even among different mineral rawmaterial sectors; and estimates of future market trends. Themethod thus provides valuable information for identifyingchanges on the mineral raw materials markets at an early stage.The method can be used to help companies to make betterinformed decisions whether to take action to ensure the supply ofraw materials.

This method – among others – is used by Volkswagen AG toassess long-term trends in the mineral raw materials market.The automotive industry is particularly strongly affected bythe availability and price of raw materials in its pre-productionvalue-added chains. By carefully selecting materials andincreasing the efficiency of material use, as well as by the

targeted use of hedging or long-term contracts, negative markettrends can be financially counteracted at an early stage.This is especially a sensitive field, given the context of newtechnological developments and indications of risky raw materialcompositions.

Acknowledgements

The results of this study are based on a joint research projectbetween the research department of Volkswagen AG andGermany’s Federal Institute for Geosciences and Natural Re-sources (BGR) entitled ‘‘Criteria and Indicators for Risk Evaluationin the Supply of Mineral Raw Materials’’ (translated title) carriedout between September 2005 and May 2006.

The BGR is the central geoscientific authority providing geo-related advice to the German Federal Government and the

ARTICLE IN PRESS

D. Rosenau-Tornow et al. / Resources Policy 34 (2009) 161–175174

economy. This also refers to the activities of the BGR in the field ofmineral economics. We would like to thank D. Homberg-Heumann and E. Westphale for the comprehensive preparationof data, tables and graphs. We would also like to thank Dr. D. Huy,Dr. J. Vasters and Prof. F.-W. Wellmer for critical discussion.

The research department of Volkswagen AG examines ques-tions of sustainable material procurement and development,amongst others. The results are used in the evaluation of rawmaterial markets, future technological trends and in corporateplanning. We would like to thank M. Wagner, Dr. U. Elsner andDr. M. Gernuks for their valuable contributions and ideas duringthe execution of the research project.

Table A1

Basic data for assessing long-term supply risks Unit

1. Current market balance

Mine production Tonnes/year

Smelter production Tonnes/year

Refinery production Tonnes/year

Mining capacity Tonnes/year

Smelter capacity Tonnes/year

Refinery capacity Tonnes/year

Freight volume, harbour and freight capacity Tonnes/year

Recycling volume Tonnes/year

Production shortfalls Qualitative

Stocks at exchanges, producers and manufacturers Tonnes/year

Consumption volume Tonnes/year

Raw material price (real, nominal) US$

2. Production costs

Cash operating costs US$/tonne

Total production costs US$/tonne

Treatment/refining charge US$/tonne

Energy costs US$/tonne

Transport and freight costs (e.g. Baltic Freight Index) US$/tonne or index

Technological progress reducing costs for exploration,

mining, processing and recycling

Qualitative

3. Market power

Mergers and acquisitions Qualitative

Company concentration HHI

Import dependence (of a consumer company under

consideration)

%

4. Geostrategic risks

Country concentration %

Country risk World Bank scale

Import dependence (of a consumer country under

consideration)

%

Trade restrictions Qualitative

5. Future supply and demand

Supply trends

Planned additional annual production capacity by new

mining projects (grassroots, pre-feasibility, feasibility status),

mining projects under construction, and mine expansions

Tonnes/year

Exploration budgets US$/year

Static life time of reserves/resources Years

Planned investment in smelters and refineries US$ or tonne/year

Planned investment in ship building (bulk) US$ or tonne/year

Planned investment in recycling facilities US$ or tonne/year

Production as by-product Tonnes/year

Supply elasticity Qualitative

Demand trends

Metal demand foresights based on historic trends % growth and

tonnes/year

Metal demand foresights based on future technologies and

innovations

% growth and

tonnes/year

Global and regional GDP % growth

Industrial production, consumption on goods, urban

population, etc.

% growth

Material intensity Quantitative

Substitution Qualitative

Social and environmental restrictions Qualitative

Demand elasticity Qualitative

Finally we would like to thank the reviewers of ResourcesPolicy for their valuable contributions and advices to improve themanuscript.

Appendix 1. Selection of basic data for assessing long-termsupply risks for mineral raw materials. The list is open tofurther additions

See Table A1.

References

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