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Gloomy mining chiefs see copper-tinted light at end of tunnel

May 24 2015 12:19
Firat Kayakiran, Jesse Riseborough and Agnieszka de Sousa

(File) (Shutterstock)

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London - The world’s biggest mining companies haven’t agreed on much lately as they argue about how to deal with a glut of iron ore and coal.

When the subject turns to copper, however, they’re on the same wavelength.

Executives of BHP Billiton [JSE:BIL], Antofagasta, Rio Tinto Group, Freeport-McMoRan and Glencore all pointed to copper in comments this month as the one commodity not dogged by oversupply. Demand is proving resilient, according to analysts who cite China’s response to a slowdown in economic growth by sanctioning a number of previously delayed infrastructure projects.

“If you’re looking for a single structural long-term bullish argument for owning a commodity, just look at copper,” said Clive Burstow, who helps manage R522.92bn at Baring Asset Management in London.

In an interview last week, the head of the world’s largest mining company painted a gloomy picture for the industry. BHP’s Andrew Mackenzie said that in all the minerals markets in which it operates, any demand increase can too “easily” be met by expanding existing mines.

One exception he sees is copper.

The red-brown metal is used in pipes and wires in houses and appliances and is second only to silver as a conductor of electricity and heat. Last month, China’s imports of concentrate, a semi-processed ore from mines, rose about 4% from a year earlier after climbing to a record in March.

Price jump

While copper is still far off its 2011 record of $10 190 a metric tonne, prices have advanced 15% from this year’s low on January 26. The metal traded at $6 173 a tonne as of 17:17 in London on Friday.

“The demand picture appears to be improving fast and seems to be the main factor supporting the price recovery,” Kevin Norrish, a mining analyst at Barclays, wrote in a May 18 report.

First Quantum Minerals wants to speed up the development of its projects to coincide with rising copper prices, according to President Clive Newall. The Vancouver-based company, which produces African copper and Australian nickel, expects prices to rally to $8 800 a tonne in two to three years as the market moves into a deficit.

Right timing

“One of the ways we create those exceptional returns for shareholders is by getting the timing right,” Newall said in a telephone interview on Thursday. “You get to a deficit very quickly and it grows very rapidly. The only way to satisfy that is to develop projects that require substantially higher copper prices.”

For Rio Tinto, the world’s second-biggest miner, copper is proving to be an antidote to a collapse in the price of iron ore, responsible for 81% of its 2014 profit. This week, Rio signed a long-awaited accord with Mongolia’s government letting it expand the Oyu Tolgoi gold and copper mine.

Afterward, Jean-Sebastien Jacques, the head of Rio’s copper unit, gushed about the metal’s prospects, stating “we love copper.”

Jacques said in an interview that “supply is very challenging in copper and when you look at the next 10 years there’s a clear shortfall of around eight million tonnes.” That’s equivalent to about eight mines the scale of Escondida in Chile, the largest copper mine.

25 years

“It took nearly 25 years to build Escondida, so therefore we’re pretty bullish about copper,” he said.

The chief executive officer of Antofagasta, the Chilean mining company that’s the world’s ninth-largest producer, also fails to see a market glut this year.

“The large supply surplus that has been forecast for the past couple of years has been like a bow wave being pushed out in front of us but never materializing,” Diego Hernandez said.

Disruptions at operations owned by BHP and Freeport-McMoRan have fueled speculation that a global surplus of the metal will disappear. Macquarie expects a copper deficit of about 40 000 tonnes this year. The bank forecast a surplus of 104 000 tonnes in January, down from an October estimate of 475 000 tonnes.

“The fundamentals mid-to-long term in the copper business are as strong as any commodity could be, supported by demand from global growth and also by significant supply constraints,” Richard Adkerson, CEO of Phoenix-based Freeport McMoRan, told a conference in Barcelona last week.

One of the most outspoken critics of oversupplied markets is Glencore CEO Ivan Glasenberg, who last week accused the biggest miners of damaging the industry’s credibility and creating a “crisis of confidence.” Even he sees copper bucking the trend of swollen metals markets.

“We believe copper is moving into a deficit,” he said at a meeting of Glencore shareholders on May 7. “Consensus has always said there is a surplus. The grades are going down. People are struggling to hold their current production levels.”

- With assistance from David Stringer in Melbourne.

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