Freeport to BHP Spotlight Tight Copper as Citi Sees Tailwind

  • BHP lowers estimates after strike at Chile’s Escondida mine
  • Freeport’s Adkerson sees a ‘looming significant deficit’

The biggest copper producers are sounding the alarm on mounting supply troubles.

BHP Billiton Ltd. lowered its estimates Wednesday for full-year output by as much as 18 percent. Freeport-McMoRan Inc. on Tuesday slashed its estimate for 2017 sales by 200 million pounds (90,718 metric tons), adding to what Citigroup Inc. described as “structural tailwinds” that support its outlook for higher prices. Teck Resources Ltd. said output fell 22 percent in the first quarter, while Rio Tinto Group last week pared its guidance for this year.

“It’s a fascinating market and I actually think it’s a big story because the price hasn’t reacted so strongly, all things considered,” Dane Davis, an analyst at Barclays Plc in New York, said in a telephone interview. “The big theme in the first quarter was supply disruption, and I think the key theme in the second quarter is going to be on demand -- Chinese demand.”

Copper has gained 3.2 percent in London this year, compared with 16 percent for aluminum, even after the six-week strike at BHP’s Escondida mine, labor and weather interruptions in Peru and Indonesian government restrictions on shipments from Freeport’s Grasberg site curtailed supply.

The metal gained as much as 0.6 percent before settling 0.2 percent higher at $5,715 a metric ton ($2.59 a pound) at 5:51 p.m. on the London Metal Exchange Wednesday. Citigroup analysts including David Wilson said prices should trade toward $2.67 by the end of May, while the World Bank raised its 2017 price forecast to $5,750, from $5,400 in January.

The supply of concentrates will continue to tighten through the rest of the year, as production growth from Peru slows, Citigroup analysts wrote this month. The fees miners pay processors to refine the metal have fallen this year, signaling limited availability of concentrates, the bank said. It estimates disruptions cut global output by 385,000 tons this year.

Warnings from Freeport compound supply concerns at a time when inventories of copper and aluminum tracked by the LME are already shrinking and global economic growth may pick up. The International Monetary Fund raised its forecast for global growth to 3.5 percent this year, up 0.1 percentage point from January, the Washington-based fund said in its latest World Economic Outlook.

“It’s been a difficult year,” Freeport Chief Executive Officer Richard Adkerson said on the earnings call Tuesday, referring to issues the company faced that resulted in the suspension of exports from Grasberg in Indonesia.

BHP, which controls Escondida, the biggest copper mine, said full-year output from the site will be as much as 27 percent lower than expected as a result of the strike. Escondida guidance was cut to between 780,000 tons and 800,000 tons from an earlier estimate of 1.07 million tons, the Melbourne-based producer said in a statement. Projects to construct a desalination plant and make improvements to a processing facility will be delayed, it said.

Producers paint an even more bullish longer-term picture.

At a conference earlier this month, Teck CEO Don Lindsay said years of low prices have cut off the investment pipeline. The equivalent of five new Escondidas are needed by 2025 to avoid the market going into deficit at a time suppliers face funding challenges.

“The new greenfield projects are particularly scarce and so we have a looming significant deficit in this business and the question is the timing for that deficit, which will be dependent on events in China and the global marketplace,” Freeport’s Adkerson said.

— With assistance by Danielle Bochove, Steven Frank, and David Stringer

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