Seems I'm not the only one who wonders what is really driving the current copper price fall which has left the price at the marginal cost of production for many producers. The following article passed onto me by Pumpa with his many admin side mining connections highlights the situation and if you think at more than the superficial "sandpit" level you may get some ideas of what will possibly happen for AVB come 2018 and potentially being a 50,000 tonne per year miner.
http://www.mineweb.com/news/base-metals-and-minerals/copper-heading-1-5-million-tonne-deficit-2018/
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Copper heading for 1.5 million tonne deficit by 2018 Bernstein senior analyst, Paul Gait, sees a huge copper supply deficit arising over the next few years. Lawrence Williams | 19 February 2015 12:39
While most mainstream bank analysts don’t see it – perhaps being too fixated on current spot prices in their analyses – global research and investment management group Bernstein senior analyst, Paul Gait, looks to the medium- and long-term view and sees a massive copper supply deficit building over the next few years and reaching as much as 1.5 million tonnes by 2018. Speaking at the Natural Resources Forum Latin America meeting held at London’s Royal Institution, Gait also commented that he does not see the China dominated supercycle as being over, but only about a third into its full course. This suggests a major turnaround in the copper price, which is currently languishing at around the $2.60/lb ($5,700/tonne) mark, over the next two to three years.
These are controversial statements going hugely against much current thinking, but he makes some good points on his way to this prediction, but does warn that copper frequently seems to confound analysts’ predictions both on the upside and downside.
At the moment Gait says that
cash mining costs are on average close to the copper price itself but that historically base metals, apart perhaps from aluminium, tend to trade at a substantial premium to cash costs – and copper particularly so to normally average 50% above costs. When copper has slipped to the kind of relative level it is at now it has tended to make an extremely strong recovery as the price levels dissuade mining companies from investing in new projects and expansion programmes and leads to cutbacks and closures in existing operations. With big new copper mines nowadays taking perhaps as much as 30 years from initial find to permitting, processing and production a hiatus of this nature can, and will, lead to severe shortages ahead.
So we have a scenario of a potential big further lift in demand ahead as China eventually gets back on the growth track and demand recovery elsewhere, while at the sharp end – the world’s major copper mines – we are seeing declining grades with, nowadays, head grades running above reserve grades – a sure recipe for major production declines from the big low grade mining operations. This is typified by the current situation at the world’s largest copper mine, Escondida in Chile, which is seeing a grade decline, as are other massive copper operations like Bingham Canyon and Alumbrera.
Indeed the copper surplus predicted for 2014 does not seem to have come about and latest analysis suggests that the year saw a small deficit, which could increase this year and become very significant in the years ahead. And if China recovers a bit more steam over the period – it still lags major industrialised nation copper consumption per head by a huge amount, hence the comment that the so-called industrial super cycle, very much driven by China growth, is only one-third of the way through. There may be a temporary hiatus, but it will return as china continues to urbanise.
So what can the miners do to alleviate the situation? Gait said there are three paths:
Get better at mining copper. We are seeing this already, but the lower grades just mean that at best the mining sector can only just about mark time. Get better at exploring. This is being hampered by cost savings as profit margins decline due to the lower grades. Greenfields exploration is definitely being cutback while there is something of a concentration on exploration around existing mining operations. But overall virtually no big new copper deposits are being found. There are some out there but they are mostly big very low grade porphyries and there is no financial appetite for financing these potentially multi-billion dollar development projects. But also as noted above the huge lead times nowadays in bringing a new major copper mine on stream mean that even if exploration is stepped up it will still take many years to bring a newly discovered mine into production.
Better prices for copper which are almost certain to come about as the deficit widens, but will be too late to make a significant difference to output except perhaps in the ultra-long term. Higher prices too meant that miners may just mine to lower grades which, without major plant expansions, can actually lead to a further reduction in output. And if major plant expansions are put in place these can still take two to three years or more before fully implemented.
Thus the scenario suggests that copper short positions we are seeing at present can only hold the copper price down for a limited period. This leads to only one conclusion, Gait summarised, that copper prices have to rise very sharply in the medium to long term, meaning current price levels represent a great buying opportunity."
I have my own theory about those copper shorts, China is on record as planning major electricity grid upgrades, if you were thinking about buying a lot of copper and thereby pushing up the price wouldn't you like to push your starting price down a little to expedite a cheaper average?
