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OUTLOOK 2013: Copper Prices Expected To Hold Despite Projected Rise in Mine Supply

(Kitco News) - The combination of new projects coming on line and potential for some large existing mines to regain lost output should mean a jump in global copper production during 2013.

Normally, this might mean a price decline for a commodity. But in this case, analysts are not calling for the increased output to result in a dramatic sell-off next year. They point out that inventories are already historically low. Further, demand is expected to pick up as well. So whereas the market is expected to shift from a supply deficit to surplus, the surplus is expected to be modest in 2013.

Bottom line: observers look for average copper prices to be flat or make a limited move in either direction in the next year.

“It’s still a balanced market, with a little bit of a surplus compared to this year, but not much,” said Robin Bhar, metals analyst with Societe Generale. “Therefore, (warehouse) stocks will be pretty low on a historical basis….We don’t think there is going to be significant downside to the price hence, with fairly flattish price profile year-on-year.”

New Projects, Increased Output From Existing Mines To Up Global Supply

CPM Group forecast mine supply to rise 6.8% in 2013 to 17.6 million metric tons. Bhar looks for a 6.8% increase to 18 million tons, while BNP Paribas projects a 6.9% rise to 17.9 million.

More output gains still are expected in 2014. In fact, over the 2013-2014 period, BNP Paribas forecast mine production to increase by 15%.

“There are several projects in construction now pretty much on target to come on (line) in 2013,” said Catherine Virga, director of research with CPM Group.

One major new mine will be Oyu Tolgoi in Mongolia, analysts said. Analysts expect anywhere from 100,000 to 200,000 tons of copper output next year, with this to ramp up several-fold over the next few years. Some of the other major projects either going into production or continuing to ramp up include Buenavista in Mexico, Antapaccay in Peru, Los Bronces, Caserones and Esperanza in Chile, Salobo in Brazil, Konkola Deep in Zambia, Morenci in the U.S., and KOV and Tenke Fungurume in the Democratic Republic of Congo.

Part of the reason so much new output is occurring around the same time is that some previously were put on hold during the economic downturn that started in 2008, Virga explained. Back then, copper prices plunged to around $3,000 a metric ton from just shy of $9,000. Once economic conditions improved, it took a few years for development, she said. In some cases, output began last year and is continuing to ramp up, said Stephen Briggs, senior metals strategist with BNP Paribas.

Analysts cautioned that global production potentially could grow less than forecast since it often takes companies longer to ramp up output than they initially state in their guidance.

Meanwhile, Briggs said two of the world’s largest existing mines – Escondida in Chile and Grasberg in Indonesia – should start seeing higher output again after it fell for varying reasons.

Output at Freeport McMoRan Copper & Gold’s Grasberg mine fell last year due to a strike, with a spillover impact into this year, as well as lower grades of ore.

“These big open-pit copper mines tend to have quite unstable production levels because they will move in different years to a different patch of the pit, where the grades can vary,” Briggs said. “They won’t necessarily have less rock going through the mill, but if the grade is lower, the production of copper is lower.”

Output this year likely will be below 400,000 tons compared to 770,000 a few years ago, he said. But if labor disruptions abate and as the mine moves back into higher ore grades, the mine could be back up to perhaps 550,000 next year and some 800,000 tons by 2015, Briggs explained.

Past declines at Escondida, the world’s largest copper mine majority-owned by BHP Billiton, have been the result of ore grades. However, output is forecast to rise to 1 million tons or just above this year from just 800,000 last year, and production in 2013 may be around 1.1 million, Briggs said.

Rising treatment and refining charges in the industry are another indication of rising supply, Virga said. Previously, excess refining capacity kept these charges down due to competition among smelters. “Miners no longer have the upper hand because of the increased availability of supply that we’re already starting to see,” Virga said.

Copper Market To Shift To Surplus, Albeit Small One

Most analysts look for the copper market to be in a small supply surplus next year after previously being in a deficit since 2010 and also for the five years prior to the global financial crisis in 2008.

“But it’s not going to be a significantly oversupplied market like we’ve seen in the aluminum market and the zinc market,” Virga said. Much of the new supply won’t hit the market until the second half of 2013, observers said.

Virga said she expected a surplus of 150,000 metric tons for 2013, while Briggs listed 100,000. Bhar anticipated a 250,000 surplus next year.

“Prices, in our opinion will start to decline. But it won’t be a significant sell-off, coming from fairly tight conditions,” Virga said. She looks for prices to rise above $8,000 in the first half of the year but pull back in the second half.

Virga and Bhar say they look for average copper prices to be roughly flat year on year. CPM Group listed a $7,986 forecast for 2013 and Societe Generale listed $7,975. Other firms with forecast not far from these are Barclays Capital, $7,925; BNP Paribas, $7,825. Morgan Stanley and TD Securities, however, both list more bullish average 2013 forecasts $8,600 and $8,124, respectively.

Briggs said prices may uptick in early 2013, perhaps to $8,500, particularly since investors often move back into commodities at the start of a new year. But in the latter half of 2013, he forecast a pullback, although not below $7,000 on a sustainable basis.

“Copper has hugely outperformed the sector now for a decade,” Briggs said. “In the end, that does at least two things. One is it increases pressure to substitute (from) copper and use other metals, which we have seen some of, with the main beneficiary being aluminum. The second thing is when you have prices so high for so long, it leads to a pickup in the rate of development of new mines. That’s what we’re finally starting to see now.

“But it’s not that decisive. The surplus I’ve got for next year is pretty small. And at least outside of China, inventories are currently quite low.”

Meanwhile, analysts look for demand to also rise in an improving global economy next year although at a slower rate than the new mine supply. Virga anticipates 3.7% growth in global demand, while Briggs and Bhar both forecast 5%.

In particular, analysts look for increased demand from China as it develops infrastructure such as power utilities. Bhar said that the world’s largest copper consumer already accounts for some 35% to 40% of world consumption.

By Allen Sykora of Kitco News; asykora@kitco.com