Prepare for short term squeeze
but longer term prospects are brighter than ever...
https://www.metalbulletin.com/Article/3195843/Search/SPOTLIGHT-We-need-to-talk-about-copper-costs.html
SPOTLIGHT: We need to talk about copper costs
May 10, 2013 - 11:15 GMT Location: London
The copper industry should brace itself for a tighter mine supply pipeline beyond 2015, as the investment case for brownfield and greenfield projects disintegrates with copper prices below $7,000 per tonne, analysts are warning.
The weaker outlook for medium-term supply reinforces the long-term bullish case for copper prices, even as the red metal endures its weakest spell in years.
Returning from Cesco Week, which took place in Santiago in April, bank analysts signalled that the copper market is entering a new era that will be defined by stronger supply, stalling demand and lower prices.
Deutsche Bank has called time on the “halcyon days of the past decade”; former mega-bull Barclays advised clients to short any near-term rallies; even Goldman Sachs, which maintains a bullish short-term outlook, has put stop losses in place on its buy recommendations.
The analysts’ commentary lends a strong fundamental justification for the lower prices seen since Cesco, even if some view the 11% drop in the market over the past week as excessive.
Before the sell-off, Barclays warned that the copper price will need to fall towards industry cash costs of $5,000 per tonne before the market sees an immediate supply response.
But the bank simultaneously warned that today’s price environment is going to hurt future brownfield and greenfield supply that is not already fully financed.
“Producers will continue with projects that are beyond the point of no return, such as those that are slated to begin production in the next two years ... but capital spending retrenchment means boards are re-evaluating projects beyond this point,” Barclays analysts said in a note on April 15.
“When it comes to financing the next tranche of supply, today’s famine in copper prices is tomorrow’s feast, because it just won’t be possible to get financing for all the projects miners have planned,” Société Générale (SocGen) analyst Robin Bhar told Metal Bulletin on Monday April 22.
In its Cesco review, JP Morgan said five-year forward copper prices will need to hold above $7,500 per tonne for marginal operators to continue to develop future projects. At the close of trading on April 22, five-year contracts were trading at $7,296.5 per tonne.
“A sustained flush lower in prices would discourage this investment, in our view, leaving minimal room for further supply disappointments given current surplus estimates are less than 1.5% of the copper market,” JP Morgan said.
In the midst of last week’s rout, Deutsche Bank said the challenge to the copper supply pipeline caused by lower prices is now sufficiently high to alter its outlook for the market balance over the next several years.
“We suspect that deferrals in greenfield/brownfield projects will become more common and thus the prospect for lower-than-expected supply growth could be quite high,” Deutsche Bank analysts said.
Prospects for a tighter supply pipeline beyond 2015 have also been strengthened by the imminent closure of Glencore’s takeover of Xstrata, which gives the UK-listed producer-trader control of several large-scale greenfield projects.
Analysts had expected Xstrata to deliver on those projects, given its strong greenfield track record, but it is likely that Glencore boss Ivan Glasenberg will be far less committed to bringing the mines online in a timely fashion.
“Glencore has made its opinion on greenfield projects fairly clear, so I think there’s cause for analysts to pare back their assumptions for some of those Xstrata projects,” Macquarie analyst Duncan Hobbs told Metal Bulletin last week as Glencore received regulatory approval for the deal from China.
Contango, premiums to incentivise today’s production
In the more immediate term, the mined commodities sector’s failing enthusiasm for new projects and expansions in the face of lower metal prices can be seen in falling orders for Caterpillar mining equipment.
But even as prices skid to three-year lows in Shanghai and 18-month lows in London, the consensus view is that the stronger mined and refined production seen since the second half of last year will not be curtailed significantly in response to weaker prices in the near term.
The weaker prices seen today could change the copper industry’s attitudes towards hedging, as financiers look for a stable return on their investment and rethink their attitudes to price risk, analysts said.
But rising premiums in the physical market and demand for material among warehouses, traders and financiers will continue to offer a strong and attractive sales channel for producers.
“In terms of thinking about which of the projects that are in production today might be closed or cut back in response to lower prices, people need to realise that the rules of the game have changed somewhat,” SocGen’s Bhar told Metal Bulletin.
As in the aluminium market, producers will continue to turn out metal as long as financiers soak up surplus units for use in contango carry trades, Bhar said.
“If we wind back the tape a few years, you would have imagined there would be a whole host of closures in the aluminium market with prices trading where they are. But really that’s an old-school way of thinking, and those normal rules of supply and demand have been cast aside in today’s low-interest rate environment, which is really about the hunt for yield,” he said.
That appetite for material has been the driving force behind the three-fold increase in London Metal Exchange copper stocks over the past six months, which has taken inventories to their highest point in ten years.
Physical premiums have risen above $100 throughout Asia, Europe and the USA during the run-up in inventories, as warehouse companies have offered strong incentives to attract metal into storage in Johor, Antwerp and New Orleans, where there are large queues to withdraw copper.
The forward curve in LME copper prices, meanwhile, has traded in a comfortable contango throughout the whole of the year so far, both in nearby spreads and, increasingly, in long-dated contracts.
While those conditions remain in place, producers will continue to find alternative buyers for their product, even as supply increases and physical demand fades. With copper prices at 18-month lows and positioning in the LME market heavily short, they will also have reasonable hopes for a rebound in the market.
“Producers will need to be sure they’re going to be facing these price pressures for at least the next six months before making any decisions to cut output. It’s not cheap to shut down a smelter or put a mine on care and maintenance, and there are workforce considerations as well,” Bhar told Metal Bulletin.
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https://www.metalbulletin.com/Article/3203698/Search/Chiles-copper-output-up-77-in-Q1-as-major-miners-raise.html
Chile’s copper output up 7.7% in Q1 as major miners raise production
May 10, 2013 - 04:46 GMT Location: São Paulo
Chile saw a 7.7% year-on-year increase in copper production in the first quarter of 2013 on larger volumes at Codelco, BHP Billiton’s Escondida and Antofagasta’s Los Pelambres projects.
The country’s copper output reached 1.37 million tonnes in the quarter, up from 1.27 million tonnes in the first quarter of 2012, according to Chile’s copper commission Cochilco.
The country produced 492,000 tonnes of copper cathode and 885,300 tonnes of copper-in-concentrate.
Codelco, the world’s biggest copper producer, reported a 3.2% year-on-year rise in output for January-March 2013 with production at 305,500 tonnes in the quarter.
Chuquicamata y Radomiro Tomic, the company’s largest project, posted a 10.2% year-on-year increase in the first quarter of 2013 at 183,400 tonnes.
The Chilean company also reported an increase in output at its El Teniente project, where production was up by 1.6% year-on-year to 98,000 tonnes.
Codelco’s Andina and Minera Gaby operations registered lower output in the quarter.
Production at Andina was down 6.1% year-on-year to 58,200 tonnes while Minera Gaby posted a 6.6% year-on-year fall to 32,300 tonnes in Q1 2013.
Output at the BHP Billiton-controlled Escondida increased 27.2% year-on-year in the first quarter to 305,500 tonnes.
Antofagasta’s Los Pelambres saw output up 5.5% year-on-year to 104,700 tonnes in the quarter.
Anglo American Sur reported a 7.6% increase in production to 113,500 tonnes.
Collahuasi, another major mine, reported a 12.8% decrease in output in the first quarter of the year to 66,900 tonnes.
The mine is owned by a consortium consisting of Anglo American (44%), Xstrata (44%) and other investors.