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By Stuart Burns

Delegates at the recent CESCO Copper Conference in Chile from both the major miners and the major copper producers lined up for interviews, giving a not surprisingly similar and upbeat view of the market. In a Reuters report on the conference, industry experts predicted similar views of the future:

  • Copper prices would dip this year in the second quarter and possibly third before picking up in Q4
  • Treatment charges would remain depressed, probably around the low $20/ton range until the end of this year as concentrate supplies remained tight
  • Mines, particularly in Chile, Peru and at Rio’s Kennecott Utah copper mine would pick up as better ore grades were extracted and disruptions due to weather and strikes were put behind them
  • No one would admit to being worried about rising Shanghai Futures Exchange (SHFE) inventory, currently a million tons, saying it would come down this year as demand picked up.
  • New mines and refurbishment of existing mines to open up better ore grades were largely on track and supply would rise over this decade to meet demand.
  • Demand is rising in the US, stable in Europe and rising in Asia although at 1-2 percent less than last year.

So all is fine with the copper market, is it? You’d think so, listening to the quotes and comments, but an article in the Financial Times suggests there are some serious questions being asked behind the scenes.

If the number of new mines planned and under construction come on stream as forecast by the miners over the next 12-18 months, the market will move into pronounced surplus (as if the SHFE inventory wasn’t already telling us it’s in surplus) and prices could slip towards the marginal cost of production, around $5,500-6,000 per metric ton.

But increasingly industry experts are predicting those mines will not keep to the planned timeframe. Serious problems sourcing equipment, sourcing qualified mine engineers, providing power and fresh water is already causing problems and delays. Major power projects designed to service the mining industry in Chile, producer of about a third of the world’s copper, are facing repeated delays mainly of an environmental nature.

Next door in Peru, the story is similar and meanwhile, power costs are rising, according to Codelco, from 4 cents/kwhr to over 12 cents/kwhr over the last decade. Likewise, Chile and Peru both face escalating water costs and water scarcity; no new project is likely to be approved using fresh water, meaning new mines must desalinate water and pump it from the sea to the desert – a process that can add 20-30 percent to operating costs.

So who do we believe? The miners who tell us supply is assured and prices will ease as new supply comes into the market? Or observers who say the future is fraught with uncertainty, particularly in the world’s largest producing countries, concentrating the risks, and we face a significant chance of higher prices by the middle of the decade?

The answer may be as much about consumption as it is about production. The rise in Shanghai inventories is a reflection of a slowdown in construction, and production of white goods and consumer products in China. If the miners are right and this is a temporary phenomenon, then global demand will likely rise more significantly next year, strengthening the case of higher prices, with or without more supply.

But if the re-focusing of the Chinese economy proceeds as gradually as we expect, a return to strong copper consumption could be some way off. In the meantime, make hay while the sun shines — the one trend all could agree on was that prices are likely to be softer for the next 3-6 months.

Source: Copper: A Disconnect On What The Future Holds