COPPER-Major market developments in December
By Andy Home
Reuters
Friday, January 16, 2009
midasletter.com
LONDON - Here's an announcement you are not going to see on the newswires any time soon:
"BHP Billiton, majority owner and operator of Escondida, the world's largest copper mine, today announced it will be cutting back production at the mine by 40 percent in response to low prices and slumping demand. The cutback, effective immediately, is equivalent to around 520,000 tonnes of copper in concentrate on an annualised basis."
The reason this announcement is not going to be made is that the cutback has already happened. This was not, however, a voluntary curtailment. It was the result of low ore grades and mill problems at the giant Escondida operations in Chile.
The latest production figures for Escondida are both a timely reminder that involuntary mine curtailments are still a key feature of the copper market's supply dynamics and a warning that copper concentrates supply could be a serious constraint on the market's future ability to cope with any economic recovery.
CONCENTRATES COLLAPSE
BHP Billiton's 2008 production report is due to be released on Jan. 21 but Rio Tinto, which owns a 30 percent stake in Escondida, has just provided a sneak preview of the state of affairs at the world's largest copper mine.
Headline mined copper production fell by 36 percent year-on-year in Q4 2008 but even that dramatic decline doesn't fully capture the slump in conventional concentrates output.
Escondida has two production streams and the straight-to-metal leaching operations actually lifted production to 73,000 tonnes in Q4 2008 from 53,000 tonnes in the year-earlier period. Full calendar 2008 production rose to 258,000 tonnes from 238,000 tonnes from 2007.
However, copper in concentrates production tumbled to 992,400 tonnes last year from 1,246,700 tonnes in 2007. Fourth quarter production slumped to 186,300 tonnes from 316,800 tonnes. It's the latter year-on-year decline which is equivalent to just over 520,000 tonnes of metal contained on an annualised basis.
Although compounded by "electrical issues" at the SAG mill over the second half of the year, lower production was primarily due to a steep decline in ore grade, from 1.72 percent in Q4 2007 to 1.32 percent in Q3 2008 and further to 1.04 percent in Q4 2008.
Ore grade changes are a normal feature of any mine and the drop in grade at Escondida has been previously flagged up by both BHP and Rio. However, the steepness of the drop and the size of the mine have combined to create a big hit on copper in concentrates production.
The hit will last at least through the first half of this year, according to guidance from Rio Tinto.
Nor is Escondida the only big mine that is currently in a low-grade mining sequence. Both Indonesian mines, Grasberg and Batu Hijau, which between them are capable of producing wellover a million tonnes per year of contained copper, are experiencing lower production for the same reason.
The global impact has been captured by figures from the International Copper Study Group, showing mine capacity utilisation fell to 82.7 percent in the first 9 months of 2008 from 85.9 percent in the same period of 2007. Utilisation rates were running at 90 percent or above in the years 2002-2004.
FEAST AND FAMINE
The copper market is in no mood to pay much attention to what is happening at the mine level right now. It is firmly focused on the collapse in demand and the visible surplus of metal that is finding its way to LME warehouses.
The collective gripe is that copper producers are lagging far behind their counterparts in other metals in terms of reducing output to match imploding demand. Prices, it is commonly said, have further to fall if producers are to be forced to rein back output further.
But it is precisely because of the continued underperformance at the mine level that copper is still so relatively high in price.
Copper supply is currently a curious mix of feast (metal) and famine (concentrates).
Treatment and refining terms for 2009 concentrate contracts are currently being settled at around $75 per tonne and 7.5 cents per pound.
That is a sharp jump from 2008 terms of $45 and 4.5 cents. However, 2008 terms were multi-year lows. A more interesting comparison is with 2006, when the respective benchmark terms were in a range of $90-95 and 9.0-9.5 cents.
Moreover, what smelters are currently achieving is without price participation, which was dropped in 2007, and despite announced lower metal production, and therefore concentrates input, by smelter groups in Japan and China.
Terms for this year are a big improvement on 2008 but they are still symptomatic of a copper market that is struggling to generate enough units.
That shortfall is likely to grow over the medium term, precisely when the copper market will be looking for increased supply.
Rio Tinto again provides the clue in the form of its announcement earlier this month it has deferred a planned investment in its majority-owned Northparkes mine in Australia.
Half complete and due to enter production in 2010, the project's primary goal was to extend the overall mine life to 2016.
It is just one of many core developments that are being returned to mothballs. However, the copper market is going to need such mines at some point in the not-so-distant future.
Those calling for lower copper prices to rebalance the refined market would do well to consider what the impact will be on an already problematic mined market. |
