Copper price reflects trend in supply figures

Having surprised analysts with its resilience since the early stages of the recession, copper has finally reacted to the fundamentals of supply and demand. It fell through the US$1 threshold last month for the first time since late 1987.

“The copper market has finally crashed back to reality after several months in which prices seemingly ignored evidence of slower demand and higher inventories,” says John Lydall of First Marathon Securities in a recent report on metals and mining. “Unless there is some . . . reduction in production, inventories will continue to climb and prices will fall.”

Significant production shortfalls may well be in order if Codelco, a large Chilean producer, is unable to reach a lasting contract with its 8,000 employees at the Chuquicamata division. Having already breathed some life into the copper market, a recent strike at Chuquicamata is expected to spark further disruptions at Codelco’s other mines. In 1989, Codelco produced an estimated 452,000 tonnes of copper, or about 6% of world production, from just two of its Chilean operations.

But in the meantime, overall supply exceeds demand, resulting in an inventory buildup of almost 200,000 tonnes of copper at the London Metal Exchange. At presstime, the copper price continued to languish at just under $1.

“Possibly the most important development in the copper market in 1991 has been the opening of the huge Escondida mine in Chile in the first quarter of this year,” says Yorkton Natural Resources. “This mine will add about 4% to 1991’s Western World supply of copper.”

As the first finished metal from Escondida rolls on to the market, signs of economic slowdown in both Europe and Asia, two large copper consumers, do not bode well for the demand side of the equation.

“The key, really, for copper is demand over the next 6-8 months. It’s my opinion that demand will be low.” said Julian Baldry, base metals analyst for the brokerage firm of Nesbitt Thomson Deacon.

Over the long term, prospects for the copper price appear to be somewhat brighter. According to The Outlook for Copper to the Year 2000, a recent report by natural resource consultants Pincock, Allen and Holt (PAH), the copper market should experience a tight supply-demand balance from 1995 to 2000, even with the addition of new greenfield projects.

“Consumption of copper continues to grow, albeit at a slower rate than in recent years,” the report says.

While predicting worldwide copper demand will increase at an annual rate of 1.71%, the consulting firm expects supply losses encountered over the last four years (about 4%) to continue in the next decade.

Areas of concern include Peru, with its labor problems, Chile, because of geotechnical problems at two of Codelco’s mines, and Zaire, where there is a growing wave of political and social unrest.

Yorkton also calls for significant supply disruptions in the years ahead. “In the longer term, there are likely to be severe problems at Codelco, the Chilean state producer. The outlook for the mines of the Central Africa Copperbelt is bleak and output there, which currently accounts for around 12-13% of western world supply, is likely to fall sharply by the end of this decade.”

In 1989, total free world copper mine production is estimated to have been just over seven million tonnes. Chile, the largest producer, accounts for about 20% of total production.