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China Copper Demand Growing

2013 Copper Surplus


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By Swagato Chakravorty
Wednesday, March 20th, 2013

Antofagasta (LON: ANTO), the copper company, has offered an unusually large dividend based on record levels of copper production. This comes even as the company faces a $500 million impairment charge on a major project.

The dividend is set to be increased by 123.9 percent, going up to 98.5 cents/share. Overall, Antofagasta saw a revenue increase of 10.9 percent, while copper increased by 11 percent to hit 709,600 tons.

The Financial Times reports that the average price per pound of copper sold went down by 9.8 percent, while production costs rose by 4.9 percent. However, a 52 percent increase in gold production (up to 299,900 ounces) helped balance things out.

The Financial Times quotes Chief Executive Diego Hernandez:

“2013 will not be too different to last year,” he said. “It will be a little more challenging in terms of costs but not production with a similar supply-demand equation for copper so [we expect] similar copper prices.”

The impairment charge meant Antofagasta’s pre-tax profits are down $2.7 billion, while basic earnings per share dipped to 104.7 cents. Cash reserves as of the end of 2012 amounted to $2.4 billion.

News of the bumper dividend, which amounts to $887.3 million, caused Antofagasta’s shares to go up 3.11 percent, reports the Telegraph. Meanwhile, the Chilean Antucoya copper mine, which cost Antofagasta the $500 million in impairment charges, is still awaiting a final decision.

The company hopes to resolve the question of whether to continue work on that mine or not within the next few months. According to Citi analysts, however, it is rather unlikely that the company will resume work on that mine.

copperringsAntofagasta’s fortunes are an anomaly at a time when miners are focusing intensely on cost-cutting measures and on increasing efficiencies. Falling demand, rising production costs, and ore availability issues have all come together to create a difficult time for the mining sector. Large-scale ambitious projects, which can call for enormous upfront investments, are being shelved or even scratched off completely.

Many such projects, which were originally devised to benefit off the commodity price explosion, are simply no longer viable. Antofagasta, for example, expects its copper, gold, and molybdenum production over 2013 to be fairly lower, compared to 2012’s figures.

However, increasing demand from China could see a revival of the copper mining sector. China is already the world’s largest copper user. The current oversupply is no problem for that country, which may indeed absorb much of the surplus production this year, as Bloomberg reports.

The Center for Copper and Mining Studies has come out with a report that suggests copper supply will exceed demand by anything between 100,000 to 200,000 metric tons over 2013. This increased output, emerging both from established and newer mines, cannot find adequate demand from Western nations, but China’s appetite for the metal could see it buy up in ever-larger quantities, thus easing the glut.

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From Bloomberg:

“In previous years we faced an important deficit,” [Executive Director, Center for Copper and Mining Studies, Carlos] Guajardo said. “The question is whether the surplus is enough to put pressure on prices or the higher demand in China is able to absorb this transition to surplus.”

In fact, global production of refined copper is expected to go up by 3 percent over this year, but Chinese demand is set to go up by 5-6 percent over the same period. Moreover, copper consumption over there is expected to increase even more in the near future.

The London Metal Exchange saw copper for 3-month delivery drop by 0.3 percent, to $7,805/ton, as of 3:30PM on March 13, Bloomberg reports. That’s a drop of 1.6 percent over the year.

Meanwhile, total mined copper output is expected to go up by 1.9 million tons by the year’s end. Citi analysis suggests that the Rio Tinto Group’s (NYSE: RIO) Oyu Tolgoi mine (expected to start up in the second half of this year over in Mongolia), a growth of 30 percent in Freeport-McMoRan Copper and Gold Inc.’s (NYSE: FCX) Grasberg mine (Indonesia), and ramped-up production in Chile’s Escondida mine are going to see the largest increases.

The total gain of 6 percent in the volume of refined copper production means we’ll likely see an oversupply to the tune of 458,000 tons, since global consumption is expected to increase by a mere 1.5 percent.

 

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