Codelco Won’t Rush to Increase Output Despite Rising Copper Price

As the copper price continues to increase, many investors are wondering whether its rise will prompt major miners to bump up their output. This week, Chile’s Codelco, the world’s biggest copper producer, said it will not attempt to do so.
Speaking on Tuesday (February 27) at a BMO Capital Markets conference in Florida, Codelco Chairman Oscar Landerretche said his company does not plan to increase its copper production by speeding up projects.
He also said that the copper industry is facing natural obstacles that will prevent other companies from doing so. “It’s going to be very difficult for the industry to respond even if it wanted to,” Bloomberg quotes Landerretche as saying. “It’s becoming very, very hard to do new projects.”

Expanding on those statements on the sidelines of the conference, Codelco CEO Nelson Pizarro told Reuters that despite the rising copper price, the company will stick to a shrunken capital expenditure program to revive and expand its copper assets. The company cut its budget for the assets from $25 billion to $18 billion last year when the copper price was low.
Initiatives at those assets will include replacing depleting ore bodies, Landerretche said. Over the next 20 years, production should be flat at 1.6 to 1.7 million tonnes a year. Before trimming its budget, the company had projected that output would reach 2 million tonnes annually.
In the last six months, copper futures have risen more than 30 percent, and were trading at $2.69 per pound on Thursday. Landerretche believes the metal should be supported at $2.60 to $2.70 this year. Longer term he sees the copper price getting closer to $3 as the market shifts into deficit.

Deficit ahead

Landerretche is not the only one who believes a copper deficit is coming.
Speaking at the same conference in Florida, Freeport-McMoran (NYSE:FCX) CEO Richard Adkerson said the copper market is “inevitably” heading for a deficit as disruptions hit major mines.
His company is currently locked in a standoff with the Indonesian government over permission to export copper concentrate produced at its Grasberg mine, which is the world’s second-largest copper producer. Meanwhile, workers at the Escondida mine, the largest copper producer in the world, have been on strike for about three weeks.
Labor negotiations at Escondida are seen as a benchmark for the industry, and difficulties there could be a sign that other big copper producers will have trouble with wage negotiations this year. About 15 percent of annual copper production will be subject to wage negotiations in 2017.
Supporting that idea, Pizarro said he expects “more difficult” labor negotiations at Codelco’s El Teniente mine early next year as workers’ demands for higher wages and benefits clash with the company’s need to invest in its aging mines.

Adkerson also sees delays at new projects contributing to a copper deficit. For example, the Arizona-based Resolution project held by Resolution Copper, a joint venture between Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) and BHP Billiton (NYSE:BHP,ASX:RIO,LSE:RIO), has faced challenges “on a number of fronts.” And while Freeport has six projects in its pipeline, it would take 10 years to see significant production from them.
“Global economic conditions, particularly conditions in China, have improved,” he said. “Supply growth has always been challenged and continues to be even with higher prices.” All in all, it looks like a higher copper price is in the cards long term.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.