By R. Bruce Striegler

The market for copper is equal to approximately $120 billion each year, which rivals that of even iron ore. The problem is: copper is not being discovered fast enough to meet upcoming demand. A study by Wood Mackenzie found that there will be a 10 million tonne supply deficit by 2028. That’s equal to the annual production of the world’s biggest copper mine (Escondida) multiplied by a factor of ten. Trading at US$2.13 during the last week of February, copper is near a 6 1/2 -year low, leaving most analysts asking why, given what they see as relatively robust Chinese demand and recent supply cuts. The decoupling of analysts’ views and copper’s current price underscores how analysts, from oil to potash, have been caught out by the depth of the commodity rout.

Eight out of ten analysts surveyed by The Wall Street Journal said the price of copper was far below levels at which the supply and demand picture would reasonably suggest it should be trading. Copper prices fell by more than a quarter in 2015. The metal has been on a downturn after hitting $10,000 per tonne at the beginning of 2011. LME (London Metals Exchange) copper prices have fallen in every year since 2011. Only in 2012 did they manage to hold steady, closing roughly flat as compared to the previous year. Copper’s 2016 outlook could depend on the prevailing demand and supply situation, and all eyes are on China. The country accounts for just less than 45 percent of global consumption, or about 22 million tonnes annually. In the past six months, copper prices on the LME were above $6,400 a tonne, but in January 2016 were in the $4,500 range.

Will copper really fall into deficit?

Revising earlier forecasts, the Lisbon-based International Copper Study Group (ICSG) estimates a deficit for the bellwether base metal, despite the slowdown in Chinese demand. In its October 2015 release, ICSG noted that it expects copper demand to outpace refined copper production in 2016, pushing the market into a deficit. In its earlier estimate, ICSG had estimated a production surplus of 230,000 tonnes for 2016. Analysts say that in 2016 a small deficit of around 130,000 tonnes is likely as demand growth outpaces production growth. “Although a downward revision has been made to global usage in view of lower than anticipated growth in China, larger downward adjustments have been made to production as a result of recent announcements of production cuts,” ICSG said in a release.

The commodity’s price is seen as key benchmark in global markets and an indicator of global economic health. An eventual rebound in copper prices might presage an end to the current stagnation in China’s economy, but analysts say the market will probably have to wait more than a year for signs of recovery to appear. Analysts polled by Reuters last October had expected the global surplus to shoot up to 350,000 tonnes in 2015 from a forecast 94,300 tonnes in 2014. But since then, several of the giants in copper have trimmed production, Rio Tinto reduced 2015 outputs at its Kennecott U.S. operation by about 100,000 tonnes and BHP Billiton has cut around 150,000 tonnes from forecast production at Escondida in Chile, the world’s largest copper mine, while Glencore reduced its forecast for output at its Alumbrera mine in Argentina by 50,000 tonnes. ICSG said last fall that world mine production after adjusting for historical disruption factors was expected to increase 1.2 percent in 2015 (a similar growth to 2014) to reach 18.8 million tonnes. “Despite announced production cuts, higher growth of four per cent is expected in 2016 as additional supply is expected to arise from expansions at existing operations, a ramp-up in production from mines that have recently come on stream and output from a few new mine projects.”

Some miners closing operations; others increasing production

Many analysts point out that global sentiments should also impact copper prices. They say that copper’s 2016 outlook could depend on global economic activity, and might see a spillover from geopolitical tensions onto risk assets. The study by Wood Mackenzie which found there will be a 10 million tonne supply deficit by 2028 also points out that it now takes longer to go from discovery to production than ever before, noting that geological, environmental, and political challenges have brought the average lead time to around 20 years for new mines. These new realities must also line-up with economic realities, and Thomson Reuters GFMS estimates that for new copper supply to come online, copper must rise to $3.50 per pound.

Copper mining is all about grade and scale. The majority of global output comes from mega mines that have massive economies of scale to reduce costs. However, it has been a long-running trend that the grades for these established mines are dropping. A good example of this is Escondida, in Chile. It produced six percent of global copper output in 2014, but like all the other large copper projects, suffered from declining grades. In 2007, the copper grade was 1.72 percent, and is expected to drop by 50 per cent in coming years. In fact, BHP Billiton is expecting a year-over-year decline of 24 percent between 2015 and 2016. Chile’s Codelco, the world’s largest copper miner overall, announced two years ago a $25 billion investment plan to expand aging mines, but nevertheless expects no significant gain in production for its efforts.

The world’s ten largest copper mines produced 4,315.2kt of fine copper in 2014, representing about 23.3 percent of the world total according to ICSG. But the fact that Codelco, which vies with U.S.-based Freeport-McMoRan Copper & Gold as the world’s number one producer of the metal, is spending $25 billion over the next several years just to keep output steady is also telling. Add these factors together, and stock market valuations of copper producers are at their lowest levels since 2008. Further, four percent of the world’s copper mining capacity falls off the table each year, which means that this must be replaced somehow. With ten Escondidas needed to fill a 10 million tonne supply deficit by 2028, metals investors need to stay vigilant as changes in the market will be coming.

Canadian copper miners feel the turbulence

In British Columbia the government is offering the mining industry an emergency lifeline in the form of deferred electricity bill payments that could be worth more than $300 million if all 13 mines take advantage of the program. Along with a number of troubled coal mines, copper mines are big power consumers. For example, Energy and Mines Minister Bill Bennett said Teck’s Highland Valley copper mine near Kamloops spends about $30 million a year on power. In response to increasing production costs, Highland Valley announced in November 2015, that it was cutting its copper workforce by six percent by the end of 2016.

Imperial Metal’s Mount Polley copper mine consumes about $18 million a year worth of electricity. The company’s new Red Chris mine in northern B.C. produced its first copper concentrate on February 17, 2015 with first shipments weeks later. Imperial also received permits to partially restart its Mount Polley operations, which had been suspended since the August 4, following a 2014 breach of the tailings embankment. However, the company’s Huckleberry open pit copper operation in west-central B.C. was not so lucky. After taking significant steps to reduce operating costs, the mine suspended operations in early January this year due to declining copper prices. The suspension will affect approximately 100 of the 260 employees. The remaining work force is being retained to continue milling stockpiled ore.

In a statement issued February 9th in Vancouver, Taseko Mines President and CEO, Russell Hallbauer, says electricity is one of the Gibraltar mines’ most significant expenses, accounting for nearly 10 per cent of total operating costs, “This cost deferral program has the potential to reduce Gibraltar’s annual spending by up to $20 million, or roughly $0.15 per pound of copper production, at the current copper price of approximately US$2.10 per pound, effective this month.”

Hallbauer has also noted that, “Financially and operationally, Taseko performed extremely well in 2015, despite a challenging business environment. Even with significantly lower copper pricing, cash flows from operations increased to $52 million and earnings from mining operations before depletion and amortization were $51 million. We ended the year with a strong cash position of $76 million, up $23 million from the end of 2014. Subsequent to year end, we also completed a US$70 million credit facility to further strengthen our balance sheet. The initial proceeds were used to repay a US$31 million loan which had a May 2016 maturity and the balance of the facility will be available to us moving forward.”

Vancouver-based copper miner Capstone Mining Corporation reported in January that it will begin laying off employees at its Minto Mine about 240 kilometers north of Whitehorse in early April unless copper prices start to rise. The mill and other operations would close in April 2017, leaving a care and maintenance crew at the mine site. In a CBC story Ron Light, the mine’s General Manager says, “Our job is to watch the market and see if we can mine longer,” adding that despite uncertainty about the mine’s future, morale at Minto remains high.

Meanwhile, Casino Mining Corporation, a subsidiary of Western Copper and Gold, announced in February that its proposed mine in Yukon Territory will be reviewed by the Yukon Environmental and Socio-economic Assessment Board at the highest level of review possible. Casino Mining is planning to build what would be the Yukon’s biggest mine, about 400 kilometres northwest of Whitehorse, producing over 400,000 ounces of gold per year and more than 200 million pounds of copper. Molybdenum and gold-silver doré bars would also be produced. Concentrates would be trucked to the port of Skagway, Alaska for ocean shipment. Up to 1,000 jobs would be filled at peak construction and the mine would employ about 600 people during its minimum expected 22-year life.

Vancouver-based First Quantum Minerals whose seven mines produce copper, nickel, gold, zinc and platinum group elements, has five additional projects in development. The company principal assets are located in Zambia, Panama, Peru and Argentina. Its largest development project projects is Cobre Panama, a large open-pit copper development project in Panama, located 120 kilometres west of Panama City. The concession consists of four zones totalling 13,600 hectares. Last fall, First Quantum revised the estimated capital cost of the project down seven percent to US$5.95 billion, but when reporting results for the fourth quarter on February 18, 2016, the company announced a further reduction of the capital cost estimate to $5.48 billion leading to a total reduction of 15 percent from the original estimate of $6.42 billion. The savings result from efficiencies achieved to date in the critical earthworks, concrete and construction aspects of the project, better pricing on materials and equipment procurement, together with a number of smaller cumulative savings opportunities. Cobre Panama is now about 40 percent complete with the port fully operational and final work on the power station nearing completion.

During the first week of March 2016, copper prices rose as worries over possible further U.S. interest rate hikes diminished, sending the US dollar to a two-week low, thereby increasing the price of metals priced in US currency. London Metal Exchange benchmark copper surged 3.5 per cent to close at $US5,027/tonne, after touching $US5,059, its highest since November 5, scoring a weekly gain of nearly seven per cent, the most since December 2011. Published reports indicate that investors are also hopeful that an annual meeting of China’s parliament starting on March 5 will announce measures to boost economic activity. Industrial metals have been bolstered by stronger equity markets around the world, firmer oil prices and a softer US currency. There have also been mounting expectations for further stimulus measures from central banks in Europe and Asia, as Bloomberg reports copper stockpiles are shrinking, signaling tighter supplies at a time when a robust U.S. labor market is helping to support the consumption outlook.