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After a drop in third-quarter copper production, miners are signalling that they will increase production while placing large projects on hold amid global economic uncertainty.
Many of the world’s largest copper producers reported a drop in output in the third quarter. Now, miners are trying to balance the need to raise production to take advantage of possible demand with the positive impact on prices that a shortfall would have. Some are promising to boost production — to a point.
“Current production will continue to decline due to depletion of resources and lower ore grades,” BHP Billiton( ASX:BHP,NYSE: BHP,LSE:BLT) said in its base metals briefing at the end of September. “Substantial investment in brownfield and greenfield capacity will be required to cover the demand gap. Therefore, on average, prices will need to remain high enough to induce new supply.”
The decision to increase production — or not — is far from straightforward. While Bloomberg reported that more analysts now anticipate upside for copper prices because of accelerated industrial production in China and new-home construction in the US, an iNVEZZ article notes that others, including the International Copper Study Group, anticipate an “impending copper surplus.” The article also cites Goldman Sachs metals analyst Max Layton’s expectation of a “sharp decline in building completions” in China that would result in “significant downside risk to copper prices in late 2013.”
Thursday the red metal rose for a third day. On the London Metal Exchange, copper for three-month delivery was up 1.1 percent in mid-afternoon trading at $7,845 per tonne, up from $7,759.5 on Wednesday, helped by improved manufacturing data from China. COMEX copper for December delivery was up 0.03 percent at $3.5475 per pound in New York.
According to BHP CEO Marius Kloppers, opportunities ahead will be based not on the price of metals, but on the ability to increase volume without incurring much higher costs.
So, while BHP sees the need to increase production, its decision in August to put the $30-billion expansion of the Olympic Dam copper project on hold illustrates the industry’s reluctance to make large commitments amid uncertainty in the global economy. “[W]e’re not in a position to take any decisions for years,” on the Olympic Dam project, Kloppers said last week, according to Bloomberg.
BHP’s third-quarter copper production fell 12 percent from the preceding quarter, largely because of lower output from the Escondida copper mine, which accounts for nearly 60 percent of the group’s production. But, looking ahead, its overall copper production will grow 10 percent per year, mainly on higher production at Escondida after the completion of maintenance work. And while Olympic Dam may be on hold, the group still plans to spend a total of $22 billion on exploration and development in 2013.
Freeport-McMoRan Copper & Gold’s (NYSE:FCX) copper output fell 7 percent in the first nine months of 2012 compared to a year ago, mainly due to lower ore grades at the Grasberg mine in Indonesia. It too plans an increase in production “as we return to higher grade ores at Grasberg and through the execution of brownfield expansions in the Americas and Africa, expected to add one billion pounds of copper annually over the next three years.”
“We have near-term expansion projects, a pipeline of longer term projects before us and that’s going to allow us to deliver large quantities of copper to a world that will need it and pay good prices for it,” Freeport CEO Richard Adkerson told CNBC.
Seeking Alpha contributor Mel Daris isn’t quite as optimistic about Grasberg’s prospects. It is located in the province of Papua, which has a problem with separatists who have been blamed for attacks in the area around the mine. In addition, the mine suffered a miners’ strike last year that lasted three months, and production was halted again in the first quarter after more violence.
“At the end of the day, investing in Freeport-McMoRan Copper & Gold right now would be a bet that things work out for the better in Indonesia (which is a good possibility but not certain),” Daris said.
Meanwhile, despite copper production rising 29 percent in the quarter, gross profit dropped more than 50 percent at Teck Resources (NYSE:TCK,TSX:TCK.B), and in light of uncertain global economic conditions the company is deferring $1.5 billion in capital spending for this and next year. Among others, it is reducing spending at its Quebrada Blanca Phase 2 and Relincho copper projects.
Bucking the trend in the quarter were Grupo Mexico (OTC Pink:GMBXF) and its 81-percent owned Southern Copper (NYSE:SCCO).
“Despite a significant drop in copper production industry-wide due to lower ore grades, work stoppages and social conflicts,” Grupo Mexico said its copper production increased by 9.1 percent compared to last year. The company also said “the fundamentals in our industry will remain solid, mainly due to the lack of supply, bad weather, strikes, the cancellation and delays in the startup of new projects, and lower ore grades worldwide.”
Grupo Mexico expects total mining investments to more than double this year to $1.76 billion. For next year, investments in Mexico will increase about 40 percent, Fox Business cited the company’s president, Xavier Garcia de Quevedo, as saying. He noted that world supply of copper hasn’t been meeting demand and the company aims to ramp up production.
Southern Copper’s third-quarter production also rose, albeit by a more muted 3 percent, and for next year production will be “a little bit better” than 2012, according to Raul Jacob, head of investor relations. Jacob also said Southern’s capital expenditures will total about $1 billion this year and rise to $1.9 billion in 2013 and $2.1 billion in 2014.
Securities Disclosure: I, Ragnhild Kjetland, hold no investment interest in any company mentioned in this article.