METAL MARKETS Lower costs aid producers

Learning to survive with low copper prices for most of this decade made the return last year to higher metal prices even sweeter for North American copper producers.

Among those reporting sigificant gains in 1987 was the huge American firm Phelps Dodge, whose primary metals segment had earnings of $224.2 million(US), more than three times its 1986 total. The chairman of PhelpsDodge, while not predicting the higher prices will sustain themselves for much longer, is optimistic about the near future.

Unless the next economic downturn develops into a deep and widespread recession, “I think we likely will see a good string of successive years of moderate prices, moderate growth and respectable profits for our domestic copper- producing industry, ” G. Robert Durham recently told an American Metal Market copper forum in New York.

“If I’m wrong and overly optimistic and I don’t think I am then the programs to increase our competitiveness we have been implementing at Phelps Dodge, and the similar efforts throughout our industry, should permit us to endure whatever economic storm we have to face.”

In his speech, Durham spoke of changes in the copper industry during the past 15 years and the profound effects they have had, including substantial production- cost increases experienced by American copper producers. Spiralling costs

The spiralling costs, he said, were caused mainly by three factors: the steep rise in oil prices which had major repercussions in the business world and a negative impact on capacity expansions by the industry; labor cost increases and several years of double-digit inflation; and, huge costs incurred to retrofit smelters with environmental controls.

Foreign competition also picked up, Durham said. Phelps Dodge’s production cost rose from 30 cents per lb in 1972 to more than 80 cents by 1981.

“The results were, as you know, overproduction, excess inventories, falling prices and an extended depression for our industry of a depth not seen since the early 1930s,” he said.

“Prices reached record low levels (when adjusted for inflation), and remained there right through the first half of last year, until three- and-a-half years of very strong copper consumption soaked up the excess inventories and brought production and consumption into better balance.’`

American producers had to change some of their thinking and the outcome, Durham said, has been a major restructuring of the U.S. copper industry during the last several years. Cost reductions

Cost reductions have played a large part in Phelps Dodge’s most current business plan; the company’s production cost now averages about 55 cents , and the aim is to lower those costs to below 50 cents (in 1987 dollars) during the next several years, Durham said.

The Phelps Dodge chairman thinks the fundamental supply- demand balance within the copper industry should moderate the effects of the next recession.New industry production is forecast by the company to be about 5% this year and the same again in 1989.

Prolonged higher prices, he argued, would not in the long run be beneficial to the industry, although they are welcome while they last. “We have succeeded in cost reduction to a point where we can now be competitive against other metals and materials in the end markets for which we compete,” he said.

“And these high prices are not needed by much of the industry; the average comex spot copper price last year the first year Phelps Dodge ever earned over $200 million was only 78 cents .”