OPINION — Low copper prices settle in

While mine closures have had the impact of reducing copper concentrate availability, the volume of production will be overwhelming in the second half of 1998 and throughout 1999. To have visible impact on London Metal Exchange (LME) prices in the short-to-medium term, producers will have to cut output sharply. To date, there has been little sign of that.

Asian consumption will fall sharply in 1998, exacerbated by currency difficulties and destocking. However, Metal Bulletin Research (MBR) is optimistic that this will be followed by restocking in the second half of 1998 and onwards. Asian consumption is forecast to fall 3.7% in 1998 before increasing by 1.6% in 1999.

Despite this weakness, the economies of the U.S. and Europe are expected to grow. Forecasts for Western World copper consumption remain positive at 1.2% and 2.6% in 1998 and 1999, respectively.

In the short term, prices could stage a short rally, prompted by funds taking profits and the resulting short covering. Fundamentally, the market could be in approximate balance in the second quarter of 1998, though rising stock levels should prevent a squeeze from developing. From the third quarter onwards, however, assuming no significant closures, prices are set to continue downwards.

The price of copper over the next five years will be low, owing to the following factors:

qThe cost of copper production is falling, primarily due to the widespread use of solvent-extraction electrowinning technology, though the rise of “superpit” operations is also a factor. Of the closures announced in the last quarter, only concentrate mines were affected.

qThe current level of reductions will reduce utilization rates at smelters and refineries. Further steep reductions are necessary in the near term to force the closures of high-cost mines. Only then will there be a substantial reduction in supply.

qOperators of smelters and refineries are reluctant to close them due to the high capital cost of such plants. Owners may prefer to operate at a loss for a number of years, believing that competing operations will shut first. As a result, smelters and refineries are unlikely to close in the short term.

qAs a result of such intransigence, the price of copper will remain low and some plants will be forced to close, likely Russian and Chinese stand-alone plants. However, because such operations employ many people, there may be a prolonged period before shutdown. Delayed closures are also possible at Thai, Indonesian and Indian plants. Namibian, Serbian and South African plants are also vulnerable, whereas Japan is loosening its tariff protections, so downstream demand investment is likely to save its plants from having to close. While North American producers are relatively high cost, their predominant status will prohibit them from giving up production.

It is likely that this period of low prices will subsist for a number of years. On a quarterly basis, the fundamentals suggest that the current quarter may well be in approximate balance. The long decline in prices to date may result in funds taking profits, and any improvements in Asia will positively impact already battered prices. A rally in prices is forecast to occur over the next quarter as funds short cover and consumers enter the market as it is perceived to hit bottom. The rally is likely to be capped, however, as producers sell forward at higher prices.

— The preceding is an excerpt of a release on the copper market by London-based Metal Bulletin Research