Sept. 14 (Bloomberg) -- Rio Tinto Plc, the world's third- biggest mining company, and Antofagasta Plc are contributing to a surge in copper prices by increasing production of molybdenum, a metal used to harden steel found in the same rock as copper.

Copper prices have jumped 28 percent in a year as demand exceeded output from mines and recycled scrap by 65,000 tons, the Lisbon-based International Copper Study Group said Sept. 9. Molybdenum has risen fivefold over the past two years.

``We've watched copper production come in less than expected,'' said Cannacord Capital Inc.'s Greg Barnes in Toronto, rated Canada's top metals and mining analyst in a survey by research company Brendan Wood International. ``A lot of them will try to produce as much molybdenum as they can while sacrificing copper. This may keep the copper price propped up.''

Rising copper prices have helped fuel profit at producers such as Chile's Codelco and hurt earnings at users including Paris- based Nexans SA, the world's biggest maker of cables and wires. Global supplies of copper have plunged this year, with stockpiles monitored by the London Metal Exchange falling to the lowest since 1974, amid surging demand from China.

Antofagasta yesterday reported a 77 percent increase in first- half net income as it raised production of molybdenum by 27 percent. Copper production declined 12 percent.

Rio's net income from its biggest molybdenum mine more than doubled to $465 million during the period, it said Aug. 4.

Molybdenum trades at $30 a pound, according to Metal Bulletin. It was at $2.28 a pound in 2001. Copper for December delivery on the London Metal Exchange was at $3,605 a ton in London yesterday, up from about $2,786 a year ago.

Rising Demand

Demand for copper will increase 3 percent this year, Standard Bank in London said on July 7. China, the world's biggest copper user, expanded consumption of copper by 13 percent. Molybdenum demand is also rising because China increased steel production.

Rio Tinto is extracting molybdenum from copper ore at Bingham Canyon in Utah. Antofagasta is mining molybdenum at Los Pelambres, one of its three copper mines in Chile.

London-based Rio said it sacrificed 11,000 metric tons of copper production in the first half to focus on ``high'' molybdenum-content rock at Bingham Canyon, the world's largest man- made excavation.

``Under certain market conditions that rock might be considered waste,'' said Jim Cowley, vice-president of sales at Kennecott Utah Copper, Rio's U.S. mining arm. Getting to the molybdenum is ``as simple as sending diggers to one part of the pit as opposed to another.''

Antofagasta, the world's eighth-largest molybdenum producer, reduced some copper production to focus on areas at Pelambres that contain more of the silvery metal. The London-based company said July 27 that second-quarter copper output fell 14 percent to 108,500 metric tons. Molybdenum output surged 30 percent to 2,500 metric tons, it reported.

`Prioritize'

``We've made efforts to prioritize areas of high grades of molybdenum'' at Pelambres, said Gonzalo Sanchez, commercial director of Antofagasta Minerals, in an interview from Santiago. ``With molybdenum at $30 a pound it's always going to be profitable.''

The global molybdenum market is equal to less than 1 percent of the copper trade in tonnage terms. World demand for molybdenum rose 10 percent in 2004 to 170,100 metric tons, the London-based International Molybdenum Association said. The world's molybdenum shortage was 2,000 metric tons in 2004, 2,600 tons in 2003 and 6,100 tons in 2002, Chile's government copper statistics agency Cochilco said in a Sept. 7 report.

Chile is the world's largest maker of molybdenum, accounting for 28 percent of world output, according to Cochilco. The U.S. is second and China third, the agency said.

Oil-Industry Use

Molybdenum doesn't melt until it reaches 2,623 degrees Celsius, making it ideal for alloys used in aircraft engines, missiles and petrochemical plants. By comparison, lead, which is used in car batteries, melts at 327 degrees Celsius.

Demand for molybdenum has also jumped because of its use as a reducer of sulfur in crude oil. Valero Energy Corp., Premcor Inc., ConocoPhilips and Marathon Oil Corp. have spent more than $2 billion in the past four years on oil refineries to handle high- sulfur crude, known as sour oil. About 10 percent of molybdenum is used as catalysts in the oil industry, while 76 percent of molybdenum goes into stainless-steel making, Cochilco said.

Rio's Bingham Canyon produced 6.1 percent less copper in the first half of 2005 than a year earlier, while molybdenum output surged 181 percent to 7,100 tons. As a result, Rio's Kennecott unit mined 9 pounds of copper for every 1 pound of molybdenum, down from a ratio of 27:1 a year ago, the company said.

``That's almost three times as much molybdenum in each ton of ore that we are milling,'' said Cowley.

Chile, Peru

Chile's exports of molybdenum will almost double this year as Codelco, the world's No. 1 producer of the metal, lifts output by 38 percent to 33,400 metric tons, Cochilco said.

Copper output in Peru, the world's third-largest producer, fell almost 19 percent in June to 75,999 tons from a year earlier, the country's Energy and Mines Ministry said on its Web site Aug. 23. Molybdenum output surged by 50 percent to 1,529 tons.

Grupo Mexico's Southern Peru Copper Corp., the owner of two mines at Cuajone and Toquepala in Peru, produced 330,441 tons of copper in the first half of 2005, down 8.9 percent. Production of molybdenum jumped about 19 percent to 7,614 tons.

Increased production of molybdenum may prompt prices to fall this year, according to analysts at UBS AG and Morgan Stanley. The metal may drop almost 50 percent by next year to average $15 a pound, Paul Galloway, a London-based analyst at UBS, said Sept. 6. Prices may slip as low as $10 a pound in the next 18 months, Morgan Stanley analyst Wayne Atwell said in February.

New Capacity

China may be the ``swing factor'' in increasing global molybdenum supplies in 2006, Galloway said. China closed several mines this year, causing exports of smelted molybdenum to fall 31 percent in the first six months, Galloway estimated.

Phelps Dodge, the world's third-largest copper producer, Anglo American Plc, the world's second-largest mining company, and Toronto-based Falconbridge Ltd. are among companies that may also increase molybdenum production, he said.

Santiago-based Molymet SA, the world's No. 2 producer of refined molybdenum, is spending $78 million to expand its roasting capacity and lower carbon emissions, Cochilco said.

International Molybdenum Plc, a London-based exploration company, is seeking to finance a $500 million project on the eastern seaboard of Greenland that would produce about 6 percent of global supply. The project was abandoned in the 1950s because molybdenum averaged between $3 and $4 a pound, Chief Executive Graham Mascall said in an interview.

``It's a different world at today's price of $33 a pound,'' said Mascall, who was former head of mergers and acquisitions at BHP Billiton Plc, the world's largest mining company. ``We don't think the price is going back to $2 a pound. Molybdenum will continue to be in short supply.''

To contact the reporter on this story: Matthew Craze in London at mcraze@bloomberg.net

Last Updated: September 14, 2005 01:46 EDT