BHP Billiton (BHP) and Rio Tinto (RIO) were upbeat about the prospects for their copper businesses this week – forecasting rising production over the rest of 2014 and into 2015.
BHP said copper production for the quarter fell 5% to 414,000 tonnes but was up 2% for the nine months to March to 1.3 million tonnes. BHP said it is looking to expand copper production in the current quarter and maintained its June 30 full year forecast at 1.7 million tonnes.
Rio Tinto was also confident about its copper involvement, but warned that for various reasons, output in calendar 2014 would be lower. The company said its share of mined and refined copper production is expected to be approximately 570,000 tonnes and 260,000 tonnes, respectively.
"Mined copper guidance is approximately 60 thousand tonnes lower than actual production in 2013. Around 50 thousand tonnes of this reduction is due to divestments completed in 2013, with the remainder driven by the smelter shut and a decrease in full year ore grades at Kennecott Utah Copper, expected to be partially offset by increased production at Oyu Tolgoi," Rio said.
Neither company discussed the sense of gloom now gripping the copper industry after its big annual talkfest in Chile last week.
The gist of that meeting was that copper companies around the world face testing times in the next year or two – with some possibly pressured to close – according to the latest industry survey from Reuters GFMS, the best known researchers in metals (including gold and silver).
The firm warns that a surge in mine production could send copper prices down to $US6,000 a tonne, and possibly below, later this year – a level last seen in the immediate aftermath of the global financial crisis.
"The annual average price is expected to fall below $US7,000/tonne in 2014 for the first time since 2009, with a test of the $US6,000/tonne level deemed likely over the second half," the survey said.
At that level, world prices would be below the break even levels of the miners responsible for 10% of the world’s annual copper output.
But giants like Escondida (owned by BHP Billiton and Rio Tinto,), mines run by Codelco, the big state-owned group in Chile, Freeport McMorran (its Grasberg mine in Indonesia) and mines owned by Glencore in the US and South America – would still be in profit – their break evens are said to be around $US5,000 a tonne.
Copper prices have already fallen sharply in 2014 – they are down around 10% and the lowest they have been for around three years.
Chief cause for concern is the impact of the slowing Chinese economy, which accounts for 40% of global copper demand.
On top of that fears about rising production levels and a growing surplus of metal over consumption, have helped maintain downward pressure on prices.
But in its annual copper survey, Thomson Reuters GFMS has forecast further price weakness and more pain for producers.
On Wednesday, the price of three-month copper at the London Metal Exchange was $US6,541 a tonne) it hit $US6,675 last week). That’s just over $US3 a pound, on Comex in New York.
Those prices are just above the $US6,613 a tonne minimum operating costs of the so-called “90th percentile” copper mines – those that produce the 10% of global output at the highest expense – according to CRU.
This is the copper production that is first to be cut or stopped when prices weaken to these levels.
In the report Reuters GFMS said the market had entered a period of "strong supply growth" as miners begin to deliver on investments made during the boom years of the commodities cycle .
As increased mine supply trickles down the production chain, prices are likely to test $6,000 a tonne in the second half of the year, the report said.
While large copper miners will still make money at that level, smaller marginal producers will struggle and may be forced to curtail output by cutting production levels or closing mines.
Mined copper output grew 8% to 17.8 million tonnes last year, the fastest growth rate in a decade, and thanks rising production in Chile and the Democratic Republic of Congo, which overtook Zambia to become Africa’s largest copper producer.
The slowing pace of growth in China (as we saw with this week’s March quarter GDP dipping to an annual rate of 7.4% from 7.7% at the end of last year) and the higher production will see a small surplus of around 2% this year, or about 400,000 tonnes of metal.
There are an estimate one million tonnes of metal in Chinese warehouses, much of which is linked to exotic funding deals for the owners.
Part of the concern this year is that the slow emergence of financial strains in China among non-bank finance groups might see some of that metal dumped into world markets to raise cash to repay loans or by financiers seizing the metal because clients can’t repay their loans.
The growing list of defaults (made public in China by government and companies) hints at growing strains in parts of the economy, especially property.
Rob Smith, Senior Base Metals Analyst from the GFMS said in commentary with the report “whilst many commodities markets have been on the back foot of late, the copper market has been particularly susceptible to weakness given its heightened exposure to the Chinese market, through both traditional end-use demand as well as finance-related routes."
"With the risks to the copper market skewed to the downside, against a backdrop of rising mine supply and modest market surpluses, prices are likely to remain subdued over the rest of this year”. Thomson Reuters forecasts that copper prices will trade within a broad range of $6,000-7,000/tonne for much of the remainder of 2014."
And that view was supported by a senior executive of Rio Tinto who told Bloomberg in an interview at last week’s conference in Santigao that copper overcapacity will last the next two or possibly three years, and prices will “remain volatile”.
Jean-Sebastien Jacques, Rio’s copper CEO said “The overcapacity that we are seeing for this year is on the back of investment decisions made five or 10 years ago".
“The entire industry is of the view that there will be overcapacity in the next two or possibly three years.”
And much of that new capacity was built by companies bedazzled by the China boom story.
So how long before we hear those words said about the outlook for iron ore?
