Posts Tagged ‘peru’

South America : Copper cartel on the horizon ?

blackboard_copper22With global copper prices sinking from a 2008 high of $4 per lb, down to todays miserly, $1.25 per lb, it is hardly surprising that the two major copper producing countries in South America are looking at ways to buoy up their operations. Last week, Peruvian president Alan Garcia dropped some strong hints that Peru & Chile should coordinate on copper production , in order to achieve greater control of prices on international markets.

“I believe that as countries with a strong mining presence in the world we must work in a joint manner, because when brotherly countries produce and compete with the same metal, the only thing we achieve is a fall in the price of copper, and we are both losers”, said Garcia

Demand growth in China, the world’s largest user of the metal used in plumbing and wiring, slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007. Freeport-McMoran amongst others has shelved projects including a $450 million expansion at its Chilean copper mine El Abra. Freeport owns 51 percent of the mine and Codelco the remainder. The decline cut net income at Chile’s state-run Codelco, the world’s top copper miner, by nearly half to $4.5 billion in 2008.

In December, Jose Pablo Arrelano, CEO of Codelco stated copper prices will be “depressed” next year and demand almost “stagnant” as the international economic crisis leads to higher stockpiles of the metal. This will undoubtedly hurt other players in the commodities market, including BHP Billiton (NYSE – BBL) & Freeport McMoran (NYSE – FCX), Freeport McMoran have made some inroads to looking at the problem, the board announced in early December ,a  Revised Operating Plan in Response to Weak Market Conditions. Which is basically a slow down in extraction & refining in both its North & South American operations.

In Chile & Peru, copper extraction looks like a loss leader at the moment, in aggregate across all units, costs in 2009 are predicted to range from between $0.85 – $1.45 per pound. BHP have similarly looked at cutbacks regards copper extraction, the world’s biggest mining company, has delayed plans for an energy plant in Chile that it planned to build to supply two of its existing copper mines.

As discussed in an earlier post, Aussie-Canuck operator Equinox opened the largest copper mine in Africa last year, at Lumwana in Zambia, which when it comes fully online in early 2009, will be churning out 172,000 tonnes of high yield concentrate per year, which can only bring about additional competition for Codelco, BHP & Freeport, especially as Equinox has hedged production at $2.00 for the first three years of operation at Lumwana & have an estimated existing extraction cost of $0.80.

Chile may be able to weather the storm as Otto at Inka Cola puts forth in this article, the country has one of the highest per capita reserves in South America, totalling $26.49Bn, he further argues that Chile has an additional  $23Bn “tucked away in overseas accounts to call on.” Which is a considerable cushion to see out 2009, as Codelco & Arrelano await  global copper demand to turn positive in 2010.

Peru on the other hand does not look as if it will fare so well, although looking at Otto’s chart, they have a reasonable level of foreign reserves, the Andean nation is beset by rising unempolyment & a lack of foreign investment. Peru’s largest miner Southern Copper (NYSE – PCU) posted  a $125 million net loss in the fourth quarter, compared with a $311 million profit in the year-ago period, due to demand destruction. It is estimated that more than 9,000 miners have been laid off in Peru, whilst new projects have been suspended, including Southern Copper‘s plan to invest $1 billion in the Tia Maria mine. These cutbacks have already helped slow Peru’s growth rate to a projected 5% in January.

The question is, will Garcia’s plan, if it comes to fruition be timely enough ? We have seen how long it has taken OPEC production cuts to start to have an effect on the market price of crude. Of more concern for Garcia will be the new productive mines being opened in Zambia by Equinox at Lumwana & also the the Chinese backed Chambishi mine, which is operated by China Non-Ferrous Metals Mining Corporation (CNMC). The expected copper ore output is one million tons per annum, with a projected service life of 25 years. China has also embarked on an acquisition spree of late, which had also brought it interests in Australian miners such as Rio Tinto. Garcia will also have to play a careful game, as China is estimated to have committed to investing over $6 billion in Peru’s mining sector over the next five years. Politics come into play of course & the Chinese are expert in this field, my gut is that production cuts will come, although China will no doubt be exempt from any surging price changes in the near future.

My feel is that the copper mining stocks will remain low for a good time to come, much has been made of the Chinese stimulus bill, however, there is no guarantee that this will come to fruition any time soon, as & when it does kick in, China will be adequately supplied by its current investments in South America & Africa, as discussed in this piece. I am however, a little more bullish on the mining sector in general & have just initiated a position in the S&P Metals & Mining Index (ETF –  XME ,) which looks as though it may be building momentum for a bullish 2009.

Chinese raw material companies continue on acquisition trail

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Copper prices leave producers feeling “wired”

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Copper futures for March delivery fell 2.35 cents to $1.4050 a pound on the Comex division of the New York Mercantile Exchange today. Copper, which reached a record $4.2605 a pound on May 5, has dropped 54 percent this year. Copper had more than quadrupled in the six years through 2007. The decline over the last six months,gives copper the worst- performance among metals tracked on the Reuters/Jefferies CRB Index of 19 commodities.

 

Copper prices will be “depressed” next year and demand almost “stagnant” as the international economic crisis leads to higher stockpiles of the metal, Chilean  state owned Codelco Chief Executive Officer Jose Pablo Arrelano was quoted in Bloomberg today

Demand won’t recover until 2010, Arellano said today in a speech in Santiago. Prices for the metal, will return to “normal” in 2011 as the surplus declines, Arellano said, without specifying a price. Codelco is the world’s largest copper producer by 2007 output. Global stockpiles are rising as wordlwide economic expansion slows to 2 percent or less this year and next. Before a “violent drop” cut copper prices by two-thirds since May, Codelco had forecast a gradual decline, he said. The company has sold a smaller share of its production for 2009 than the 80 percent usually committed by this time.

This will undoubtedly hurt other players in the commodities market, including BHP Biliton (NYSE – BBL) / (ASX – BHP) & Freeport McMoran (NYSE – FCX), Freeport McMoran have made some inroads to looking at the problem, the board announced in early December , Revised Operating Plan in Response to Weak Market Conditions. Which is basically a slow down in extraction & refining in both its North & South American operations. In Chile & Peru, copper extraction looks like a loss leader at the moment, in aggregate across all units, costs in 2009 are predicted to range from between $0.85 – $1.45 per pound. BHP have similarly looked at cutbacks regards copper extraction, the world’s biggest mining company, said yesterday that it has delayed plans for an energy plant in Chile that it planned to build to supply two of its copper mines.

As discussed in an earlier post, Aussie-Canuck operator Equinox have just opened the largest copper mine in Africa, at Lumwana in Zambia, which when it comes fully online in early 2009, will be churning out 172,000 tonnes per year, which can only bring about competition for BHP & Freeport, especially as Equinox has hedged production at $2.00 for the first three years of operation at Lumwana & have an existing extraction cost of $0.80.

Chile, the world’s biggest copper supplier, and the rest of the world will weather “tough” months ahead, Chilean President Michelle Bachelet  said last week. Copper demand in the U.S. may weaken further, while the pace of demand growth in China may be cut by almost half to between 5 percent and 6 percent, Eduardo Titelman, EVPof the Chilean Copper Commission, said in an interview last week.

Demand growth in China, the world’s largest user of the metal used in plumbing and wiring, slowed to an estimated 9.8 percent this year from 26 percent in 2007, the commission said. Freeport-McMoRan has shelved projects including a $450 million expansion at its Chilean copper mine El Abra. Freeport owns 51 percent of the mine and Codelco the remainder.