LONDON: Something very unusual is happening in the copper market.
Here we are in the middle of the quarterly reporting season. It’s normally a time for analysts to take out the red ink and adjust down their mine supply estimates in response to the ritual litany of woe from the world’s largest producers.
Grade declines, labor unrest, equipment failure, unforeseen adjustments to mining plans have been the norm in the copper market for so many years that analysts have long ago factored in a “supply disruption” adjustment to their supply forecasts.
This time around, though, things are turning out very different.
BHP Billiton, Rio Tinto, Antofagasta, Southern Copper, Anglo American, First Quantum have all reported higher mined production for both the fourth quarter and full-year 2012 periods.
In some cases, the turnaround has been dramatic.
Rio’s output last year rose 5.6 percent to 548,800 tons after declines of 16 and 23 percent in 2010 and 2011 respectively.
Freeport McMoRan bucked the trend with a 1.4-percent decline in production over 2012. But even that was something of an achievement given an “annus horribilis” at its Grasberg mine in Indonesia, where production slumped to 315,000 tons due to a combination of low grades and the knock-on effects of prolonged strike action at the end of 2011.
Higher production from its North American assets largely picked up the Grasberg slack and the company’s Q4 output of 366,500 tons still represented year-on-year growth of 24 percent, albeit from a low strike-hit base.
Some producers, such as Antofagasta and First Quantum, even beat their 2012 guidance figures, an almost unheard-of occurrence in a market long accustomed to disappointment.
Crystallizing this dramatic shift in collective fortunes was last year’s 3.0 percent rise in copper production in Chile, the world’s largest supplier of the red metal.
It doesn’t sound very dramatic but it followed two years of zero and negative growth respectively and was actually the highest national production rate since 2007.
Chile in recent years has come to symbolize copper’s chronic supply problems, aging mines yielding progressively less as ore grades inexorably declined.
But even here, it seems, things are changing. It’s hard to overestimate the impact of the turnaround that is under way at Escondida, the world’s single largest copper mine.
As recently as 2007 Escondida produced almost 1.5 million tons in a mix of concentrates and cathode. By 2011 production had contracted to just 819,000 tons as ore grades fell below 1.0 percent, compared with over 1.5 percent in 2007.
The owners, a consortium of BHP, Rio and Japanese investors, have initiated a series of measures intended to revitalize those flagging grades and return the mine to its former glory days.
The stated ambition is to drive production back up to 1.3 million tons by 2015.
It’s a brownfield project but on such a scale that it will feel like a new mine coming on stream.
The impact was already tangible in the fourth quarter of last year, average grades surging back up to 1.39 percent and production to 287,600 tons.
State miner Codelco, meanwhile, is confident that a heavy investment program will stop the long slide in its production.
Not last year. It has guided to lower output over the course of 2012. But it is expecting things to improve this year.
Another big Chilean mine, Collahuasi, is getting the make-over treatment from its owners, who have stepped in after a truly disastrous 2012 performance.
Of course, this is still the copper market and production problems and downgrades are never going to miraculously disappear completely.
So, for example, while Chilean production seems to be on the bounce-back, that in Zambia appears to have stalled.
Preliminary figures from the central bank, and emphasis on the word “preliminary” with this particular data series, suggest that national output fell by 6.4 percent last year, the first set-back after many consecutive years of production growth.
But for the first time in a long, long time there is a sense that copper supply is finally coming good.
Proof is in the 10-percent jump in this year’s treatment and refining terms, the lightning road for supply in the copper raw materials markets.
Further proof is the sharp acceleration of concentrate imports into China. They rose by 23 percent last year, hitting consecutive all-time records over the last three months.
Chinese refined metal production has accordingly been trending sharply higher. December’s annualized run-rate of 6.83 million tons was also an all-time record.
Everything is pointing to a market that is shifting from deficit to surplus with most expecting the move to become more pronounced as the year goes on thanks to new mines such as Rio’s Oyu Tolgoi in Mongolia and the Japanese-owned Caserones in Peru.
What would a world of copper surplus look like? And what specifically would it mean for prices?
Conventional analysis would be to look at the cost curve and the price needed to incentivize producers to keep on developing new projects.
Researchers at UBS, for example, justify their call for copper to fall to $ 5,842 per ton over the course of 2014, a notable bearish outlier in the recent Reuters poll, on precisely this basis.
Two years of “relentless global mine supply growth” will force prices down to the marginal cost of production, they argue.
Analysts at Macquarie Bank are considerably more bullish than that.
Not that they disagree with the concept of copper falling to the cost of production just that they suggest the top end of the cost curve is actually much higher at $ 6,600.
And with new mine supply coming in toward the upper end of the cost curve range, “we are comfortable with copper trading in a range of $7,000-7,500/t by the middle of this decade, but this will not be at a premium to the cost curve.”
Certainly, recent events underline the dynamic nature of copper production costs, which Macquarie estimates grew by 3.5 times between 2003 and 2011. Witness, for example, Antofagasta’s warning on cost escalation at its existing operations this year and its suspension of the $ 1.7 billion Antucoya mine project due to a blow-out in projected budget.
Or consider the pressure on Rio from the Mongolian government over the revenue split from the new Oyu Tolgoi mine.
Rio has been forced to deny suggestions it was halting work on the project in protest about the latest Mongolian demands.
Negotiations between mine operator and government are scheduled next week but it looks likely that Rio is going to have to come up with some sort of further sweetener to keep the government on side.
That won’t affect the project right now. It has in fact just generated its first concentrate.
But it certainly places a question mark over any second-phase development of Oyu Tolgoi.
So even while the copper market is experiencing the rare phenomenon of improving mine supply, uncertainty about the next generation of mines, particularly their likely cost, is growing.
— Andy Home is a Reuters columnist. The opinions expressed are his own.
