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Copper Glut Seen Imperiled as Projects Face Delays

Photographer: Chris Ratcliffe/Bloomberg

An average 1 million tons of new copper mine supply is required each year to keep pace with demand, according to Societe Generale SA. Almost 60 percent of new supply will come from Chile and Peru by 2020, according to Bloomberg Industries. Close

An average 1 million tons of new copper mine supply is required each year to keep pace... Read More

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Photographer: Chris Ratcliffe/Bloomberg

An average 1 million tons of new copper mine supply is required each year to keep pace with demand, according to Societe Generale SA. Almost 60 percent of new supply will come from Chile and Peru by 2020, according to Bloomberg Industries.

Copper is heading for the biggest surplus in 13 years as new supply hits the market. The excess may turn out to be smaller than investors expect as new mines struggle to ramp up, according to the metal’s biggest producer.

The prospect of supply exceeding demand by 300,000 to 400,000 metric tons depends on the successful execution of several projects, Codelco Chief Executive Officer Thomas Keller said in an April 7 interview in Santiago.

Companies are taking a cautious approach to bringing new mines on stream as the metal trades near a four-year low and investors push for maximizing profits and shoring up balance sheets. At the same time, new mines in Chile and Peru are facing growing opposition from community and environmental groups as well as energy and logistical constraints.

“The new projects have had difficulties getting started or delays and it wouldn’t surprise me in 2014 if we see this again,” said Keller, whose surplus prediction last year didn’t materialize.

Chile achieving a record 6 million tons of production this year, as predicted by the National Mining Society, is contingent on the execution of new projects such as Pan Pacific Copper Co.’s Caserones and KGHM Polska Miedz SA’s Sierra Gorda, both in northern Chile, Keller said.

Start Delayed

The start of the $4.2 billion Caserones was delayed because of equipment repairs, JX Holdings Inc. Senior Vice President Akira Omachi said Feb. 6. Full output is scheduled for August, Omachi said at the time. JX Nippon Mining & Metals Corp. owns 66 percent of Pan Pacific and Mitsui Mining & Smelting Co. owns the rest. Caserones will test its concentrate plant with material in the coming days and begin full output in August, a local press official, who asked not to be named citing company policy, said by phone yesterday.

KGHM, based in Lubin, Poland, is seeking alternatives as far away as Iquique and Arica in northern Chile to export copper concentrate from Sierra Gorda after a local court overturned an environment-impact study that allowed the company to export material through the Antofagasta port located only about 117 miles (188 kilometers) from the mine, Mining Minister Aurora Williams said in an interview yesterday. Iquique, close to the epicenter of the world’s strongest earthquake in a year last week, is 278 miles from the mine, while Arica is 412 miles away.

Sierra Gorda is on course to produce its first copper concentrate at the end of June, Chief Financial Officer Jaroslaw Romanowski said in an April 7 interview from Santiago. KGHM is considering other transport and export routes from the mine, spokesman Dariusz Wyborski told reporters in Warsaw Feb. 28.

Mongolia Impasse

Chinalco Mining Corp. International, a unit of China’s biggest aluminum producer, suspended its Toromocho copper mine in Peru because of an alleged environmental breach, it said on March 31. Toromocho started production in December.

Rio Tinto Group wrote down $4.7 billion in its Oyu Tolgoi copper and gold mine in Mongolia as an impasse with the government persisted over starting underground operations. A further $800 million may be written down should underground mining fail to begin in the next 12 months, according to Rio, which currently operates the mine as an open pit.

“Companies are struggling to get projects on line,” Charl Malan, who helps manage about $6 billion in natural resources stocks for Van Eck Associates Corp., said in a Santiago interview. “A year ago, the surplus for 2014 was much bigger than what we think it is today and in the numbers I am seeing today people are not discounting two very big mines that aren’t operating properly.”

Production Stoppages

Stoppages at mines cost more than 800,000 tons a year from 2003 to 2009 because of labor disruptions, adverse weather conditions and technical difficulties, according to Bloomberg Industries. That dropped to about 400,000 tons a year since the financial crisis as fewer strikes occurred at major mines, Bloomberg Industries estimates.

The trend is set to reverse this year compared with 2013, Macquarie Group Ltd. said April 1.

Not all new mines are running behind schedule. State-owned Codelco is on course to reach capacity in June at the Ministro Hales mine it began last year, helping the state-owned miner exceed last year’s production of 1.79 million tons, Keller said.

An average 1 million tons of new copper mine supply is required each year to keep pace with demand, according to Societe Generale SA. Almost 60 percent of new supply will come from Chile and Peru by 2020, according to Bloomberg Industries.

‘Very Significant’

China, which now consumes more than 40 percent of the world’s copper, will continue to grow between 6 and 8 percent a year, meaning the market may return to deficit if mining companies don’t execute on new projects, Keller said.

“We still think Chinese growth is going to continue, maybe with lower percentages than in the past, but with increases that in absolute terms or tonnage terms are still very significant,” he said. “We haven’t had any cancellations and there’s still lots of interest for our refined copper.”

Codelco plans more than $4 billion of investments a year this decade as it revamps aging mines to stem output declines, Keller said. With the projects, Codelco can exceed 2 million tons of output. Without them, output would fall to 800,000 tons.

Chile and Peru’s new mines will help increase global production by 4.7 percent in 2014 and 7.3 percent next year, according to the Lisbon-based International Copper Study Group. That compares with an estimated 3.2 percent demand growth and 3.6 percent in 2015.

Tightening Market

The ICSG, an intergovernmental organization of nations involved in the copper business, predicts a refined metal surplus of about 405,000 tons this year, the biggest since 2001.

The market probably will go back into deficit from 2017 and the shortage may exceed 2 million tons by 2020, Michael Widmer, an analyst at Bank of America Corp., said during a presentation in Santiago today.

Copper for delivery in three months slid 1.1 percent to $6,597.25 a ton at 4:17 p.m. in London. Copper for delivery in May fell 1.1 percent to $3.018 a pound in New York. Prices are down 10 percent this year and reached the lowest since 2010 last month amid concern about slowing demand in China and a release of metal held as finance collateral.

“The $3 we are seeing today is consistent with the level of uncertainty that is still out there,” said Keller, who declined to predict the average price of the metal this year.

To contact the reporters on this story: Matt Craze in Santiago at mcraze@bloomberg.net; Juan Pablo Spinetto in Santiago at jspinetto@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net Steven Frank

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