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We believe that the copper concentrate market has reached a turning point from a decade of structural undersupply to a new era characterised by more plentiful availability.
While nothing can be taken for granted when it comes to copper mine supply forecasts, on paper, annual growth should approach 6% in the coming few years – but in reality we expect not much more than 3-3.5%.
However, if we have learned one thing about copper mines and miners from recent experience, it is that we should expect plenty of bumps along the road, with delays to new projects highly likely as well as all manner of other unplanned disruptions.
In fact, we would not be surprised if the path to higher mine supply growth turns out to be a dead end. It would not be the first time.
At the moment, the indicators are in agreement, at least: supply is improving.
TC/RCs are rising in the spot market and there are widespread expectations that 2013 term contracts will be settled well above this year’s benchmark of $60-63.50 per tonne/6-6.35 cents per lb, despite suggestions that BHP Billiton is offering a rollover to customers.
The latest quarterly reporting season has seen a whole host of major mining companies beat their second-quarter year-on-year performances, including BHP Billiton, Rio Tinto, Anglo American and Vale posting double-digit growth in mine output during the third quarter.
Meanwhile, Norilsk and Kazakhmys turned year-on-year contractions during the second quarter into positive growth in the third quarter. And Codelco, Freeport and Xstrata narrowed year-on-year losses in the third quarter from the second quarter (see chart below).
These trends are something not seen in copper mine supply in recent years, and reflect an improvement now occurring on two fronts.
First, there is a significant amount of new greenfield and brownfield capacity coming on stream. This is being led by the high-profile additions at Esperanza and Los Broncos, but there are many more other projects entering the commissioning phase and more in the pipeline for 2013 and 2014 (see table 1).
Second, after an exceptional year of unplanned supply disruptions in 2011, this year has seen most affected operations getting back to normal, with a corresponding rebound in output. Escondida and Grasberg are the main contributors in this category and their improved performance still has some way to run, especially at Escondida, where production of 1.3m tonnes is on the cards by 2015, from just 530,000 tonnes last year.
Therefore, on paper at least, there is a lot of growth still to come – the addition of just over 2m tonnes of production capacity out to 2015 from new operations and at least another 1.1m tonnes over the same period from existing mines.
However, the copper mining industry’s habit of underperforming cannot be taken lightly. Shortfalls in the region of 1m tpy have been common in recent years, due to a catalogue of well documented problems that include frequent and often protracted labour disputes, operational breakdowns and adverse weather, as well as the decline of head grades at ageing mines.
A high level of political risk in important new frontiers, tight labour markets, increasingly stringent environmental legislation and infrastructure inadequacies in key mining regions have also been contributing factors, and we must now add to this long list the growing trend among mining companies towards capital preservation and overaggressive investment.
Therefore, we still consider it prudent to factor a generous disruption allowance of about 1m tpy into our supply forecasts. Indeed, the list of projects that have fallen by the wayside, either temporarily or permanently, over the past year or so is a long one, headed by BHP Billiton’s postponement of Olympic Dam (see table 2). Nor would we be surprised to see this list grow.
Andy Cole Senior base metals analyst, Metal Bulletin Research acole@metalbulletinresearch.com