Codelco Plans US$2 Billion in Cuts to Lower Copper Production Cost

Chilean state miner Codelco is planning US$2 billion in cost cuts during the next four years in response to weak metal prices and declining ore grades.
The world’s leading copper producer said it needs to lose another 30 cents per pound from its production costs, which are expected to be US$1.30 this year.
Speaking to a conference in Chile arranged by Metal Bulletin, Codelco CEO Nelson Pizzaro said mining operation optimization has enabled the company to shave US$500 million from its production costs since 2014.

Cost reduction targets for this year are estimated to be between US$237 million and US$300 million. “We need to boost our production costs down to the first quartile,” he said, adding that this would mean a reduction of 30 cents. “Today we are in the middle of the second quartile,” he said.
The move to slash costs comes as forecasts by analysts continue to point to lower prices. John Normand, Head of FX, Commodities & International Rates Research at J.P. Morgan Securities says investors can profit from this scenario by going “structurally short” on copper.
In a report that takes a look at global macro themes through the balance of 2016, Normand says the economic situation in China will continue to weigh on prices.
China, with its huge manufacturing sector, is by far the largest consumer of copper. It has been estimated that 70 per cent of copper used in China is imported.
Copper consumption in China has been a vital measure of that country’s economic growth as the red metal forms a key network of its infrastructure, transporting water, and conducting electricity.

“Many markets whose returns are positively correlated with China’s industrial/investment cycle (base metals, iron ore, commodity currencies) continued to rise in the spring and early summer of 2016 despite the lack of much lift in Chinese industrial production and fixed asset investment as the authorities provided stimulus,” Normand said.
He goes on to write that Chinese commodity demand already shows signs of fading, but adds that this hasn’t been well correlated with commodity price moves except for iron ore.
J.P Morgan expects the copper price to average US$4,400 per tonne in the third quarter of 2016, before easing back to US$4,300 on the first quarter of 2017. The forecast average for 2016 is US$4,578 and US$4,200 in 2017.
Meanwhile, Scotiabank says copper inventories in London Metal Exchange warehouses have continued to grow (rising 125,000 tonnes since mid-August) with most of that material going to Southeast Asia warehouses. The total now in SE Asia warehouses amounts to 270,000 tonnes of the 340,000-tonne total, or 80 per cent.
This is up from 28 percent in January 2016.
 
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Securities Disclosure: I, Peter Kennedy, hold no direct investment interest in any company mentioned in this article.