With global copper prices sinking from a 2008 high of $4 per lb, down to today's miserly, $1.25 per lb, it is hardly surprising that the two major copper producing countries in South America are looking at ways to buoy up their operations. Last week, Peruvian president Alan Garcia dropped some strong hints that Peru and Chile should coordinate on copper production, in order to achieve greater control of prices on international markets.
“I believe that as countries with a strong mining presence in the world we must work in a joint manner, because when brotherly countries produce and compete with the same metal, the only thing we achieve is a fall in the price of copper, and we are both losers,” said Garcia
Demand growth in China, the world’s largest user of the metal used in plumbing and wiring, slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007. Freeport-McMoran (NYSE:FCX) amongst others has shelved projects including a $450 million expansion at its Chilean copper mine El Abra. Freeport owns 51 percent of the mine and Codelco the remainder. The decline cut net income at Chile's state-run Codelco, the world's top copper miner, by nearly half to $4.5 billion in 2008.
In December, Jose Pablo Arrelano, CEO of Codelco stated copper prices will be “depressed” next year and demand almost “stagnant” as the international economic crisis leads to higher stockpiles of the metal. This will undoubtedly hurt other players in the commodities market, including BHP Billiton (NYSE:BBL) (NYSE:BHP) and Freeport McMoran. Freeport McMoran has made some inroads to looking at the problem, the board announced in early December, a Revised Operating Plan in Response to Weak Market Conditions, which is basically a slow down in extraction and refining in both its North and South American operations.
In Chile and Peru, copper extraction looks like a loss leader at the moment, in aggregate across all units, costs in 2009 are predicted to range from between $0.85 - $1.45 per pound. BHP have similarly looked at cutbacks regards copper extraction, the world’s biggest mining company, has delayed plans for an energy plant in Chile that it planned to build to supply two of its existing copper mines.
As discussed in an earlier post, Aussie-Canuck operator Equinox opened the largest copper mine in Africa last year, at Lumwana in Zambia, which when it comes fully online in early 2009, will be churning out 172,000 tonnes of high yield concentrate per year, which can only bring about additional competition for Codelco, BHP and Freeport, especially as Equinox has hedged production at $2.00 for the first three years of operation at Lumwana and have an estimated existing extraction cost of $0.80.
Chile may be able to weather the storm as Otto at Inka Cola puts forth in this article, the country has one of the highest per capita reserves in South America, totaling $26.49 billion, he further argues that Chile has an additional $23Bn "tucked away in overseas accounts to call on." Which is a considerable cushion to see out 2009, as Codelco and Arrelano await global copper demand to turn positive in 2010.
Peru on the other hand does not look as if it will fare so well, although looking at Otto's chart, they have a reasonable level of foreign reserves, the Andean nation is beset by rising unemployment and a lack of foreign investment. Peru's largest miner Southern Copper (PCU) posted a $125 million net loss in the fourth quarter, compared with a $311 million profit in the year-ago period, due to demand destruction. It is estimated that more than 9,000 miners have been laid off in Peru, whilst new projects have been suspended, including Southern Copper's plan to invest $1 billion in the Tia Maria mine. These cutbacks have already helped slow Peru's growth rate to a projected 5% in January.
The question is, will Garcia's plan, if it comes to fruition, be timely enough? We have seen how long it has taken OPEC production cuts to start to have an effect on the market price of crude. Of more concern for Garcia will be the new productive mines being opened in Zambia by Equinox at Lumwana and also the the Chinese backed Chambishi mine, which is operated by China Non-Ferrous Metals Mining Corporation (CNMC). The expected copper ore output is one million tons per annum, with a projected service life of 25 years. China has also embarked on an acquisition spree of late, which had also brought it interests in Australian miners such as Rio Tinto (RTP). Garcia will also have to play a careful game, as China is estimated to have committed to investing over $6 billion in Peru’s mining sector over the next five years. Politics come into play of course and the Chinese are expert in this field, my gut is that production cuts will come, although China will no doubt be exempt from any surging price changes in the near future.
My feeling is that the copper mining stocks will remain low for a good time to come. Much has been made of the Chinese stimulus bill, however there is no guarantee that this will come to fruition any time soon, and when it does kick in, China will be adequately supplied by its current investments in South America and Africa, as discussed in this piece. I am however, a little more bullish on the mining sector in general and have just initiated a position in the S&P Metals & Mining Index (NYSEARCA:XME) which looks as though it may be building momentum for a bullish 2009.
View my stock portfolio on kaChing.
Disclosure: Author has a long position in XME.