This is an interesting article published by The Wall Street Journal focusing on copper production and supply around the world. Even with the economic slowdowns seen in China and essentially every producing nation copper demand is immediately hit. You would think that supply would begin to adjust to reflect the lower demand but the opposite is happening… Read below to understand the disconnect between copper supply and demand how how it is only getting worse.
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Global copper production is on track to hit an all-time high as companies push new projects to completion
Mining companies are digging up record amounts of copper even as prices plumb new lows, a strategy that threatens to deepen a four-year bust.
Global copper production is on track to hit an all-time high of 18.7 million metric tons this year, according to BMO Capital Markets, and many analysts predict it will expand until at least 2019.
The reason: Companies such as Freeport McMoRan Inc., MMG Ltd. and Southern Copper Co. that have sunk billions of dollars into new projects are pushing them to completion in a bet that the larger, lower-cost ventures will help them weather the rout.
Once up and running, the new mines will be profitable even if copper prices drop below $2 a pound, a level last hit in May 2009. The cost of producing a pound of copper at Freeport’s Grasberg mine in Indonesia will drop to 61 cents next year, from an estimated $1.05 in 2015, according to BMO.
On Monday, copper prices hit a 6½-year low, with December futures down 1.7% at $2.0210 a pound in New York. Year to date, copper is off 28%.
The supply growth is another sign the downdraft in commodities could last much longer than many investors expect. It also will likely complicate plans by miners such as Glencore PLC, Freeport and Teck Resources to pay down heavy debt burdens and shore up their financial health.
“It’s a classic prisoner’s dilemma: It makes sense for them as a group to have lower copper production, but individually nobody wants to cut back and give up market share and profits,” said Dane Davis, a metals analyst with Barclays.
The metal is used in products from cellphones to laptops to farm equipment, making its price sensitive to shifts in the global economic outlook.
Copper prices have been declining since 2011, and predictions for an upturn have been proved wrong again and again. In October 2013, Credit Suisse analysts forecast that prices would bottom at $3 a pound sometime in 2014. Now, they predict that prices won’t return to $3 until after 2019.
Next year, four new mines will increase the world’s copper production by 5.1%, says Barclays. These and other projects nearing completion in coming years were approved at the peak of the commodities boom, when analysts were projecting a prolonged copper shortage. It takes from seven to nine years to build a new copper mine.
“If you had to remake that decision today from the beginning, and you haven’t spent any money at all, would you build the mine? The answer in some of these cases is no,” said Rick de los Reyes, who helps manage $1.4 billion at T. Rowe Price. “That’s why commodity down cycles last so long, because you have all these long-dated projects started during the boom times and, by the time that supply comes on, it’s too late.”
Freeport McMoRan, the world’s largest listed copper miner, expects to add 1.1 billion pounds of new copper output to the roughly 46 billion pound global market in 2016. This will chiefly come by expanding two mines: Grasberg and Peru’s Cerro Verde.
At Grasberg, the world’s third-largest open-pit copper mine, Freeport spent $5.5 billion over the past decade to build an extensive tunnel network and add two underground mines, with plans for more. BMO analysts predict the Grasberg expansion will add 847 million pounds of copper to the market next year, raising global supply by 2.1% in 2016.
One of the few new mines starting next year is Las Bambas in Peru. China-backed MMG bought it for $5.85 billion in 2011 and expects to invest a further $1.9 billion to complete the project. Goldman Sachs predicts Las Bambas will increase global copper supply by 1.2% next year.
Mining-company shares have been hurt amid the weak copper prices. Miners have tapped the stock market to raise cash and sold assets to shore up their balance sheets.
“We’re in an environment where the company with the lowest debt wins,” said Clive Burstow, who helps manage $600 million at Barring Asset Management. Mr. Burstow said his fund had been cutting its Glencore stake since start of 2015 on concerns about the company’s debt and sold its position in the third quarter.
Executives are swearing off new investments. In September, Freeport McMoRan Chief Executive Richard Adkerson said the company responded to weak copper prices by cutting spending on new mine projects by 25%. “After we complete these current projects, until the market warrants further investments, we’re not going to be making them,” he said.
It is possible that companies could fail to reach production targets if operations hit a snag, which could buoy prices. Copper mines are vulnerable to supply disruptions. This year, rains, drought, earthquakes and labor strikes cut 9% from planned global mine output, versus typical annual losses of 4% to 5%, said Citigroup analyst David Wilson.