Study: New projects need a $3.50 copper price
The price of copper in New York moved sideways on Wednesday with May futures trading on the Comex market exchanging hands for $2.72 a pound after after economic data from China disappointed the market.
While China’s overall economic expansion of 7% – the second-worst quarterly growth since 2000 – was anticipated, the property sector continued to deteriorate. Residential property sales fell 9% compared to 2014 while inventories of unsold residential property rose a whopping 24%. The country’s property sector accounts for almost 60% of its copper demand.
Copper is down 12% compared to a year ago, but recovered from five-and-half-year lows struck in January on expectations of a move into oversupply and sluggish demand.
A new study from Thomson Reuters GFMS predicts a surplus this year of just under 400,000 tonnes, at the high end of analysts estimates, and an average copper price for 2015 of $5,975 – today’s ruling price.
“We do not expect a pick-up in prices of note until the latter half of 2015,” GFMS said in its Copper Survey 2015 according to Platts News:
“Wild cards remain and include supply-side surprises, with producers perhaps cutting back from planned targets, while China’s state stockpiler could be active again in the current year.”
The copper industry has a long history of these supply-side surprises.
Typical disruptions associated with adverse weather (top producer Chile has swung from severe drought to worst floods in 80 years in 2015), technical problems, power shortages or labour activity coupled with falling grades and dirty concentrates at old mines make forecasting a tough proposition.
GFMS is forecasting copper mine production to increase by over 3% this year to close to 19 million tonnes noting that a 11% decline in industry average cash costs last year means that mine closures are not likely.
“The 90th percentile, measured at $4,763/mt [$2.16 per pound], still gives the industry some space for further price decline,” according to GFMS.
The weak price makes it difficult for miners to raise development finance and GFMS estimates the incentive price for new production at just over $7,700 ($3.50 a pound) – a level last seen March 2013.
This will lead to project deferrals, commissioning delays, mothballing and downsizing of mine plans which may push the market back into deficit further out.
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2 Comments
EdT
Most new mining projects aim to be within the 50th percentile of the cost curve (based on $/lb or $/tonne of copper produced), which is almost a pre-requisite for obtaining project funding. To get to this position they either need to have a high grade; or a very low operating cost; or a combination of both. High grade, near surface copper deposits, are very hard to come by these days – especially deposits which are amenable to low strip-ratio openpit mining, which allows for low operating costs. Deeper deposits require underground mining methods which usually means much higher operating costs than the near surface deposits. Consequently, getting within the 50th percentile of the cost curve is getting harder because the known higher grade deposits are generally deeper; and the remaining undeveloped near surface deposits are very low grade (or have problems with their metallurgical process). The upshot of all this is that while demand is uncertain and growth forecasts are being paired back causing long-term prices to be based on the 90th percentile production level (where the supply curve and the demand curve intersect); there will be very few projects which make it over the dual hurdles of 15% IRR and (for long term security) being within the 50th percentile of the cost curve. This will remain the situation until either the forecast demand picks up over a reasonable period; or the high cost, marginal producers fall off the cost curve -which doesn’t make it any easier for new projects to get within the 50th percentile of the cost curve: it actually makes it harder. In either case, there will be a considerable lag before the qualifying projects, waiting in the wings, will be ready for production; and it is this inevitable lag in time during which the copper supply will reduce and demand will incrementally or even drastically increase, which will lead to the next boom in the copper price. The only thing that is uncertain about this scenario, as history has repeatedly recorded, is when it will happen.
Chris
Excelsior Mining in Arizona has a 69 cent a pound cost of copper. MIN.V is the symbol. Shares are very cheap right now