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(Kitco News) - Analysts say declining ore grades – combined with weather issues and labor-related supply disruptions – are likely to result in lower global copper production for 2011 than a year ago.
One major bank, Barclays Capital, put out a research report this week offering a specific estimate, saying it looks for a decline in 2011 global output by 300,000 metric tons, or 1.9%, to 15.8 million tons. This was a revision from the bank’s previous forecast of flat production for the year. Analysts tallied their estimates after reviewing major producers’ third-quarter earnings reports, which typically include mine-production data.
“The results of a group of corporates, which account for 40% of global mine capacity, showed output falling 7% year-on-year (100,000 metric tons) and for the year-to-date, a marginally better 4% year-on-year decline,” Barclays said. “ Taken in line with the ICSG (International Copper Study Group) data for January to July, which showed flat output year-to-date, current indications point to the overweight probability that global copper mine supply will contract in 2011.”
Barclays believes the main reasons for these declines stem from poor ore grades being mined as well as disruptions in the form of strikes, with some pipeline cuttings, and poor weather.
Stephen Briggs, metals strategist at BNP Paribas, believes that poor ore grades, namely from major mining companies, are at the top of the list for poor mine supply this year.
“Throughout the year, we’ve had reports from the major mining companies–BHP, Rio Tinto and others– reporting that their major operations show declining production that doesn’t necessarily reflect strikes or even weather, although those have been factors,” Briggs said. “They’ve mined the same amount of material but it’s tended to have a lower grade of copper in it and that’s been a feature for several years now, but it seems to have been particularly marked for this year.”
Rio Tinto’s third-quarter operations review made direct mention that mined copper was being impacted by lower grades at the Escondida mine in Chile, of which the company has a minority stake, and Kennecott Utah Copper mines by as much as 32% year-on-year. BHP saw a 24% year-on-year drop in copper production as low grades dented results.
“There are lots of factors in a copper-supply story,” Briggs said. “The biggest single one is that the average grade of copper ore that is coming out of the ground has been declining every year for a decade or so. This year is no different and may even be a little more extreme than usual but it’s no different. That’s the key underlying trend.
“Strikes have also played a part–bad weather such as snow in Chile, which is kind of a bit weird. There are whole bunch supply-side constraints that seem to be hitting the copper industry.”
While low ore grades have been a major catalyst to declining mine production, strikes have played their part, with the latest being against Freeport McMoran Copper & Gold’s (NYSE: FCX) Indonesian Grasberg complex and its Peruvian Cerro Verde Mine.
Workers at Cerro Verde, Peru’s third-largest producing copper mine, went on strike Sept. 29. Half of the workers at Grasberg, one of the largest copper- and gold-producing mines in the world, stepped off the job in mid-September. Both strikes are fueled by higher wage demands.
“Bearing in mind problems at Grasberg and along with all these other kinds of factors, you have to be very cautious on the mine-supply outlook going forward,” said Leon Westgate, metals analyst at Standard Bank.
Jesus Villegas, copper and aluminum analyst at Harbor Intelligence, said his firm’s industry intelligence results in similar conclusions. “We are not seeing any improvements on copper mine output for the balance of the year and probably early into 2012.”
Media reports have suggested a possible resolution could occur next week in the Peruvian strike, but the strike at Grasberg has been extended until Dec. 15.
Barclays believes that copper mine production will be better in 2012, but cautions that nothing is set in stone.
“On paper, the outlook for mine production in 2012 is considerably brighter, but all too often slippages and disruptions have resulted in copper-mine supply failing to live up to expectations,” Barclays said.
Other analysts also see production looking better for 2012 but agree that nothing is for sure.
“I’ve got mine supply increasing by about 2.7% for mined production and not refined production,” Westgate said. “But that’s just my best guess at the moment. A lot can change in little time.”
Briggs pointed out that producers will be mining higher-grade areas at several major mines next year.
“We do have quite a bunch of new capacity and new mines coming up over the next few years, and I think that will lead to some pick-up in mine production,” he said. “I still see a material increase in mine supply next year and my guess is that it will start to bring the copper market back to underlying balance over the course of next year, with perhaps a modest surplus in 2013.”
By Alex Létourneau of Kitco News aletourneau@kitco.com
source:forbes.com
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