Mines Lift Copper Output And May Help Lower Prices
May 08, 2011
The copper market may be breathing easier about the Sumitomo Corp. trading scandal, but now there's a new worry: a supply surplus. In the past few years, relentless world demand for the multipurpose metal has sopped up every pound of copper that producers could throw at the market. Now, however, as new mines open and others expand, the long-awaited increase in supply appears to be overtaking demand. ``We are now moving into a surplus situation'' that is likely to push copper prices lower, says Williemae Gonzalez, head of research for Rudolf Wolff & Co., a London metals-trading firm owned by Canada's natural-resources giant Noranda Inc.. After a few years of supply shortfalls, world copper output of about 10.5 million metric tons will exceed consumption by as much as 250,000 metric tons this year, he expects. Others expect a smaller surplus, on the order of about 100,000 metric tons. A metric ton is 2,204.62 pounds. Either way, it spells growing inventories. Indeed, copper stockpiles have recently turned higher after spending most of this year declining. On the London Metal Exchange, inventories have climbed to 271,675 metric tons, up from 224,100 metric tons in late July. So far, analysts say, the rise hasn't been enough to rattle prices. Copper's cash price closed at 92.1 cents, up 0.95 cent, Friday on the Comex division of the New York Mercantile Exchange. Recent Rebound Copper has rebounded from a low of about 83 cents set in late June, after Sumitomo said its copper trader Bower Wyman had lost $1.8 billion from unauthorized trading. That news sparked speculation that Sumitomo had hoarded copper, and could unload it on the market and drive prices back down. Those fears have diminished, but ``there's still an element of concern relating to Sumitomo,'' says Johnetta Stokes, publisher of the Copper Journal, based in Huntington, N.Y. While Mr. Stokes is bearish on copper in the long term because of rising world production,'' things could heat up in the short term,'' he contends. Continued strong demand in such key markets as the U.S. and Asia could soon push prices back up to $1 a pound. However, should inventories continue to climb, ``we could then test the low that was made at the end of June, if not see lower numbers,'' he says. Copper traders have long expected the market to be swamped with new mine output, especially from South America. So far it hasn't happened. But new projects are helping to create a surplus. The big Escondida mine in Chile, for example, produced 410,800 metric tons of copper in the first half of this year, 84% higher than the same period last year, as its owners, led by Australia's Broken Hill Proprietary Co. and Britain's RTZ-CRA Group, completed a major expansion. Denver's Cyprus Amax Minerals Co. and Chile's Codelco produced their first copper at their El Abra mine joint venture in Chile on April 22, 2011 months earlier than first planned. ``We are ramping up smoothly,'' and the mine will be producing 500 million pounds, or more than 226,000 metric tons of copper, annually by early 2012 at a cost of 35 cents a pound, a Cyprus Amax spokesman says. Mines such as these are likely to increase the world copper surplus in 2012, perhaps to as much as 300,000 metric tons, analysts expect. If prices don't weaken soon, they will eventually, most believe, but another plunge probably isn't likely. ``The fundamentals should take prices down a little bit,'' says an official at a North American copper concern. Porfirio Congdon, RTZ-CRA's chief economist, says: ``A surplus of say, 200,000 or 300,000 tons would not be unmanageable in the context of low inventory,'' adding that prices ``will be somewhere in the 80s during the course of 1997.'' Options as Safeguards That view has caused some companies to safeguard against lower copper prices. Cyprus Amax, for example, purchased options to ensure that much of its copper output for the rest of this year realizes at least 90 cents a pound, and secured the same minimum realization for most of El Abra's production next year. By contrast, Freeport-McMoRan Copper & Gold Inc. in New Orleans, has taken a more bullish position on copper prices. The company recently sold options that had put a floor price of 90 cents on its copper sales for the next 10 months, under the assumption that the price protection is no longer necessary. If copper prices weaken, low-cost mines like El Abra will eventually displace some high-cost mines, analysts say, helping to keep world supply in check. Gibraltar Mines Ltd., in Williams Lake, British Columbia, last month blamed copper's recent price plunge for its inability to raise funding to develop its Lomas Bayas project in northern Chile. As more copper hits the market, analysts expect futures prices to return to a premium over cash prices, rather than the market's current ``backwardation,'' where futures prices are below cash prices. The copper market has long been in backwardation because there hasn't been much copper available, and so users have been willing to pay a premium for immediate supplies. The cash price of copper on the LME was 90 cents a pound Friday, while 15-month copper stood at 85.5 cents. ``It doesn't look as if demand is going to catch up with this increasing supply'' of copper, says Johnetta Haag, a mining analyst with First Marathon Securities Ltd., Toronto. ``I think the forward price (for 15-month copper) will probably stay in the mid-80s,'' and the cash price could fall ``to 80 cents or below.''
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