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Copper Prices to Gain on Supply Squeeze

Major Copper Miner Lowers Production

Written by Brian Hicks
Posted April 2, 2013

For those who think copper is in endless supply in today’s world, a new finding might serve as a bit of a wake-up call.

According to Bloomberg, Codelco — the world’s biggest copper producer — announced last week a 5.1% drop in annual output of lower ore copper. The company reported a 20% slump overall, which puts its production at 1.647 million tons; it was 1.735 million tons in 2011.

The new findings are not sitting well with CEO Thomas Keller, which has forced him to spend a staggering amount of money — $25 billion — in order to keep the company’s reputation as the number one supplier in the world.

Instead of continuously mining in areas that have been tapped out, Keller and Codelco are looking at new mining pits that still have a great deal of potential. Still, many believe that copper content overall has fallen, and catching up could potentially be difficult.

copper barsWorkers are just as unhappy about the current situation, which has put further strain on Codelco and is making it more difficult to recover from these issues. A strike at Codelco’s Angamos port has lasted for the past two weeks, directly affecting Codelco’s shipments.

The company is currently sitting on 30,000 tons of copper that is awaiting shipment. Although Codelco’s CFO stated that the strike hasn’t affected copper production, it is doing little to help the company’s reputation, especially at a time when there is so much concern over copper supply.

One thing on which the squeeze in copper supply could potentially have a major impact is the overall price of the metal. Capital costs for copper production have risen exponentially, and the industry itself has been trying to catch up after a rather long period of underinvestment.

Copper Price Affected

These two factors may not seem at face value to have a dramatic impact on the future of copper, but it’s important to look below the surface at what this could mean for pricing.

When worldwide supply of any metal or resource drops, it stands to reason that prices will undeniably rise. The lower ore grades and high price of energy are both somewhat detrimental to Codelco; according to Platts, the company’s output dropped 30% to $5.01 billion. Given the past of Codelco, it shows a rather steep drop in assets.

In order for companies such as Codelco to continue to stay afloat, the near future may indeed see rising prices for copper. It’s a typical supply-demand situation that cannot be ignored, especially given the fact that copper is one of the most commonly used metals in industrial production throughout the world.

China, for example, relies on the metal in order to fulfill the country’s rather grandiose goals for urban expansion, which have been ramped up for the coming years.

The news of copper’s supply decline comes at an interesting time for metals in general. Gold and silver are both fluctuating in price in big ways, causing investors to scramble in order to decide which of the two is worth their focus. A higher demand for copper could throw an entirely new wrench into the situation, perhaps affecting pricing on gold and silver throughout the world in the coming months and years.

What this means for copper companies remains to be seen. It’s possible that rising costs and a squeeze on supply could mean that companies need to reign in their exploration efforts, which will do little to help the industry.

On the other hand, focusing on exploration and discovery in new areas could potentially help to reverse the lowering supply, effectively bringing copper back from its current slump.

According to Northern Miner, the U.S. price of $3.50 per pound of copper (projected for the coming months and years) could be enough to stabilize the industry. This is nothing more than an estimate, however, and putting too much stock in such a projection could prove risky.

Regardless of what happens with copper, it’s no secret that investors are keeping a close eye on the industry as well as the supply and demand of other metals throughout the world.


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