Copper miners look past present pain to future gain – by Xan Rice (Financial Times – April 14, 2014)

Santiago – These are tough times in the copper world. Prices have fallen nearly 10 per cent in 2014, testing four-year lows. Meanwhile, the long-awaited global surplus of refined metal is mounting. So why is the gloom lifting among miners?

“Short-term pain, long-term gain?” – the title of one of the main presentations at the annual copper conference in Chile – offered a hint: better days surely lie ahead.

Several key reasons to be positive emerged from Cesco week in Santiago. First, the plunge in prices is no disaster. Some small, high-cost producers may be struggling, but the industry’s healthy margins mean larger miners and producers remain comfortable.

“The big companies are still making money,” says Colin Hamilton, metals analyst at Macquarie. “And I think we have passed the point of maximum pessimism.”

Stefan Boel, a board member at Aurubis, the European smelter and manufacturer of copper products, agrees, noting that demand for wire rod has risen by up to 5 per cent year on year in Europe. “We have not seen that for a long time,” Mr Boel says. “I struggle to find reasons why prices should go down further.”

Perspective is also needed about the surplus. Thanks to the commissioning of new projects and mine expansions, the refined copper market is oversupplied. But the size of the forecast surplus – less than 500,000 tonnes at its peak in 2016 – is small, representing only about 2 per cent of current global consumption. And it will be short lived. Towards the end of the decade, the market will swing back into deficit, with the supply gap quickly widening.

Few people dispute this because the maximum output over the next decade can be reasonably accurately forecast; it takes, on average, 11 years for a copper mine to go from conception to production. “There is a wonderful opportunity for those well placed to fill that [supply] gap,” says Peter Beaven, president of copper at BHP Billiton. “There is a prize to be won.”

But will the engineers be given the budget to go for it? Miners remain in shareholders’ bad books. Hennie Faul, chief executive of copper at Anglo American, says although mining companies are “running hard just to stand still” because of declining ore grades, past profligacy means obtaining board approval for new projects will be difficult. “Investors have lost faith in us,” Mr Faul says. Exploration budgets have been slashed.

The influence of China on the copper market is another hot topic. For the next decade, the increase in Chinese demand could average 3.5 per cent a year, according to CRU, the commodity consultants, compared with 11 per cent annually over the past 10 years. This may sound worrying for producers, given that China accounts for more than 40 per cent of global demand, but it should not be, says Vanessa Davidson, CRU’s group manager for copper.

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