LONDON: Whisper it softly but copper supply may finally be turning some sort of corner.
This is a market that has been characterized by supply shortfall for almost as long as anyone can remember.
A chronic lack of investment in new mine capacity coupled with a litany of labor unrest, technical problems and falling grades has helped keep the copper price trading significantly above the cost of production, in stark contrast to just about every other industrial commodity.
The scale of the problem was last month spelt out by the International Copper Study Group (ICSG) in a release accompanying the publication of its 2012 Statistical Yearbook.
Mine production growth averaged an anemic 0.9 percent per year in the 2008-2011 period. Capacity utilization averaged just 81 percent over the same four years.
In the prior six-year period mine production had grown by 2.7 percent per year with capacity utilization running at just under 90 percent.
Look no further to understand how the copper price was able to reach those dizzying heights above $10,000 per ton early last year.
Record prices still failed to stimulate the production side. Indeed, they may have had a negative effect by fuelling a wave of labor unrest as workers fought for their share of the price boom. Things, however, may be starting to change.
A BUMPY ROAD
Symptomatic of the long-awaited supply response was the near eight-percent jump in Chilean production in August.
The scale of the year-on-year comparison in the world's largest copper producer may be overstated given the low base of last year but August was no statistical one-off.
After a weak start to 2012 Chilean production growth has been running in positive territory since April, as shown in the next graphic.
Cumulative production in the first eight months of 2012 was up four percent on last year. By August last year national production had fallen by almost five percent.
It's a similar story in other major copper-producing countries in Latin America.
Peruvian copper production in both June and July was up over nine percent on year-earlier levels with cumulative production growth coming in at 4.5 percent in the first seven months of 2012.
Mexican production, meanwhile, jumped almost 23 percent in July, underpinned by the continued ramp-up of the Buenavista mine, which last year emerged from a prolonged closure caused by a violent stand-off between owner Grupo Mexico and militant unions.
Of course, this being copper, the road from chronic shortfall to something closer to balance, if not outright surplus, is always going to be a bumpy one. There are still plenty of weak spots in the global supply picture.
Zambian production, for example, is trending lower this year after four consecutive years of recovery. Cumulative output of 562,000 tons in the January-August period was almost eight percent off the pace of last year.
Indonesia's two big mines, Grasberg and Batu Hijau, are both experiencing low grades and labor disruption past and possible labor disruption future respectively.
Unforeseen production hits are not going to go away in this market but for the first time in ages analysts such as those at Barclays Capital are now talking about the potential for "an upside risk to our mine supply forecast" ("The Commodity Refiner", 24 September, 2012).
When it comes to copper mining, risks up to now have been firmly skewed to the downside.
BATTLE PENDING
This gradual shift in global mine performance will be at the centre of talks between miners and smelters on the treatment and refining charges (TC/RCs) covering next year's shipments.
The annual TC/RCs battle serves to shine a rare light into the darkness that envelops the copper concentrates market for most of the annual calendar.
Smelters have already indicated they expect TC/RCs for next year to rise on this year's levels of $63.5 per ton 6.35 cents per pound.
Chinese players claim to have secured clean concentrates at $65.0 and 6.50 cents over the last month, up sharply from $50.0 and 5.00 cents in August and the highest spot market level in a year.
There's always some smoke and mirrors to the spot market in the lead-up to annual negotiations as smelters try to level what has in recent years been an unbalanced playing-field with the miners.
A flurry of "scheduled" maintenance shutdowns and a sudden enthusiasm for publicizing spot market deals are the normal in any year.
That may serve to overstate the trend but it doesn't change it.
Bloomsbury Minerals Economics, one of the few analysts to keep a weather eye on conditions in the copper raw materials markets, agrees that the net result of improving mine flows and smelter downtime has been a "an upward step in TC/RCs" from as low as $30 and 3.0 cents around the middle of the year to the current $60s and 6.0 cents levels.
Smelters and miners have only just locked horns in earnest on next year's terms and there are still plenty of known unknowns out there.
The biggest is the ramp-up schedule of the new Oyu Tolgoi mine in Mongolia, a potential game-changer for the Chinese smelter sector in particular.
That and more bits of the mine supply puzzle will fall into place in the coming Q3 reporting season but for the first time in a long time improving concentrates availability gives the smelters a stronger hand in their annual poker game with the miners.
How strong a hand we'll know only when the benchmark deals are inked.
EARLY INDICATOR
Improving global mine performance isn't going to become manifest in the refined copper market just yet though.
It takes time for greater availability of raw materials to translate into better availability of metal.
Moreover, the refined market is itself still highly stretched.
Visible copper stocks held in London Metal Exchange (LME) warehouses are still painfully low at 223,500 tons, equivalent to just four days' worth of global consumption.
There is more metal sitting in Shanghai's bonded warehouse zone but right now demand weakness not supply strength remains the biggest threat to newly resurgent copper prices.
But watch out for where those TC/RC talks settle.
They may be the earliest indication of whether the copper market is, at last, going to emerge from years of persistent supply deficit.
— Andy Home is a Reuters columnist. The opinions expressed are his own.
