Copper producers position for price recovery

The copper industry is faced with a dilemma as debate intensifies over when the price of the metal will start to recover.

The global pipeline of copper projects is shrinking as low prices curtail funding and investment. Planned projects are being put on hold and miners are focusing instead on cutting costs and improving productivity of their existing mines and workforces as global commodity prices show few signs of recovering amid weak Chinese demand.

The world's largest miners, from Chile's Codelco to London-listed Rio Tinto, do not predict copper demand to exceed supply until at least 2018, after which they forecast growing deficits.

Citi, however, says that could come sooner, in 2016, as the pipeline of new projects empties.

So, is now the time to be starting to invest in new projects to capture future copper price increases?

"The real concern is that under the current project development environment we may see projects failing to keep pace with copper demand altogether," says Piotr Ortonowski, an analyst at CRU, the commodity market consultancy. "For most major copper mining companies the focus has shifted away from long-term production growth, a strategy that exemplified the 2000s, towards existing asset portfolio optimisation."

After rising to a record above $10,000 a tonne at the peak of the so-called metals "supercycle" four years ago, the price of three-month copper on the London Metal Exchange slumped to a five-year low of $5,340 in January, and dipped below $6,000 again this week.

Prices of by-products from copper mines, such as molybdenum and gold have also fallen, offsetting gains from weaker local currencies and a lower oil price.

Spending has been cut on projects where construction has not started, according to CRU. Other projects are being divested, while financing for smaller miners has dried up as investors become less willing to provide funds, CRU said at its copper conference in Santiago last week.

Meanwhile, copper miners Freeport-McMoRan and Teck Resources have both cut their dividends to shareholders.

Even maintaining existing levels of output is getting more expensive amid rising labour, energy and water costs, while declining ore grades reduce further available capital for new expansions.

In Chile, the country that produces the most copper, state-owned Codelco, plans to spend $25bn over the next five years just to maintain current production. The company's large mines are ageing, requiring deeper digging, while the company is also spending on desalination plants to use seawater.

A desalination plant at Chile's Escondida, the world's largest copper mine, is expected to cost about $3bn.

"The fact that Codelco has to invest so heavily and at a time when the rest of the Chilean copper industry is really slowing down in its investments really makes us the only show in town," Oscar Landerretche, chairman of the board of Codelco, told the Financial Times.

About 60 per cent of the money will come from the company's own funds, and $4bn has already been contributed by the government, Mr Landerretche said. It aims to raise the rest of the money in the debt markets - roughly the same amount the company has raised through debt in the last few years, he said.

The world's biggest miners remain confident in stronger copper demand, pointing to growth in power cables in China and rising urbanisation in other emerging markets such as India.

Copper assets are attractive because there is likely to be constrained supply coupled with broad demand, former Xstrata chief executive Mick Davis said at this week's FT Commodities Global Summit in Lausanne.

Financing for early-stage projects for private miners is proving more difficult to obtain, however, despite the predictions of a copper deficit after 2018 by the major mining companies. It takes about 11 years to develop a copper mine from advanced exploration stage through to commission.

"Given the forecasted deficits and the bullish outlook from the majors, we would normally expect strong financing flows into early-stage projects to time the mining cycle and capture higher prices in five to 10 years' time," say analysts at Barclays.

"However, anecdotal evidence suggests that this is not the case and that development of the critical first-stage elements of the project pipeline has been frozen."

The lack of new copper projects in the pipeline could result in a market deficit earlier than the big miners expect, according to Citi, which forecasts a deficit of 61,000 tonnes for 2016.

"We believe downside price pressure has been overrun and investor positioning has been oversold," said David Wilson, an analyst at Citi.

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