Copper market divided as industry gathers in Chile

The world's top copper conference opens in Chile, the largest producer, on Monday as prices for the metal hover near five-year lows and miners grapple with waning demand from their most important customer, China.

The price of copper, used in wiring and electrical goods, has fallen sharply this year - similar to other commodities including iron ore and coal - as China's economy slows.

This has put significant pressure on copper miners, and last month Freeport-McMoRan, the world's largest listed producer of the metal by output, said it would cut its dividend for the first time in seven years.

At the World Copper Conference in Santiago, there are likely to be divisions among attendees over whether copper will suffer a prolonged downturn like iron ore.

This is because copper, unlike iron ore, is used by a diverse range of industries including car manufacturers and property construction companies.

Also, unlike iron ore, copper does not suffer from excess supply, with analysts forecasting a modest surplus this year. "Copper is continually constrained on the supply side, and that is unlikely to resolve itself in the near future," Barclays analysts said.

But as China enters the second quarter - normally the strongest in terms of demand - there are few signs of a pick-up. The speed of credit approval from banks has slowed, fabricators are not running at full production, and traders are still waiting to book long-term supply contracts, according to market participants. Stocks of copper in the country's port warehouses have also failed to fall, suggesting weak demand.

"I think we haven't seen the worst yet - there's more supply of metal coming in the second half," one market veteran said.

On the supply side no other country comes close to Chile's dominance: it alone produces about a third of the world's copper. Companies including Chilean state-controlled miner Codelco, Antofagasta, BHP Billiton, Anglo American and Sumitomo all have operations in the country.

Attendees at the Santiago conference will want to know how much the fall in Chile's peso and the price of oil has benefited the country's miners by reducing their costs. This could give a clue as to how many smaller miners can survive at current prices, and keep producing.

Floods last month in the country's Atacama Desert, one of the driest places on earth, caused miners to suspend operations. The Atacama is the home of more than half of Chile's copper mines and accounts for more than 60 per cent of output, Macquarie analysts said.

There is uncertainty around future investment in the country. The quality of the copper in Chile's mines is in decline, increasing costs for the miners because they have to produce more to satisfy customers.

Other mining companies, such as Glencore, have invested in copper production in the Democratic Republic of Congo and Zambia, where ore grades are higher.

Still, as billions of private equity has been raised to put into mining deals, copper could be attractive if prices are set to rebound.

Anglo American is in the process of trying to sell three of its smaller copper mines in Chile.

"People see the long-term potential for the industry," one industry veteran said. "You have declining grades globally and if you can find a decent mine already operating or close to operating that adds value."

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