Copper Titans Gather as Decade-High Glut Overshadows Quakes

Apr 07, 2014 10:24 am ET

(Updates with comments from minister in 13th paragraph.)

April 7 (Bloomberg) -- The world’s strongest earthquake in a year and hundreds of aftershocks rattled the copper-rich Atacama Desert last week, forcing almost a million people to seek refuge from tsunamis. The copper market barely reacted.

The metal is down 0.7 percent in London since Anglo American Plc to Antofagasta Plc temporarily halted some operations after an 8.2-magnitude temblor struck on the evening of April 1. Investors’ indifference is explained by surging global output at a time of waning Chinese demand growth.

As tremors continue to shake northern mines, it will be the prospect of the biggest global glut since the so-called super- cycle began -- and how miners are reacting by shelving expansions and shoring up balance sheets -- that dominate discussion at the industry’s annual get-together in Santiago this week. Chile, the top producer, is opening three mines in a year, more than it has started in the past decade.

“Demand is not going to grow by the same margin, which is going to generate a significant surplus,” Alvaro Merino, head of research at Chilean mining society Sonami, said in an April 4 interview. “You are really going to see this increase in the second half of this year.”

Thomas Keller, chief executive officer of Chile’s state- owned Codelco; Hennie Faul, head of copper at London-based Anglo American; and Antofagasta CEO Diego Hernandez are among participants at Cesco 2014. Their expansions will help lift Chilean production to a record 6 million metric tons, breaking a decade of stagnant output, Merino said. Codelco, the world’s biggest copper miner, KGHM Polska Miedz SA and Pan Pacific Copper Co. are all opening mines in the Atacama.

Widening Excess

The new mines will help increase global production by 4.7 percent in 2014 and 7.3 percent next year, according to the Lisbon-based International Copper Study Group. That compares with an estimated 3.2 percent demand growth and 3.6 percent in 2015. The ICSG, an intergovernmental organization of nations involved in the copper business, predicts a refined metal surplus of about 405,000 tons this year, excluding changes in unreported stocks, the biggest since 2001.

CRU estimates a surplus this year of 140,000 tons, Vanessa Davidson, copper group manager at the London-based metals researcher, said in a March 24 interview. That’s almost four times bigger than previously estimated. The excess will widen to about 250,000 tons in 2015 before exceeding 400,000 tons a year later, Davidson said at the time.

Copper for delivery in three months declined 10 percent this year to $6,612.50 a ton on the London Metal Exchange. Prices reached the lowest level since 2010 last month amid concern about slumping demand in China and a release of metal held as finance collateral.

Stimulus Talk

China’s efforts to stimulate growth and how that will affect the market balance will be a key talking point at this week’s Cesco dinner, traditionally held at Santiago’s elegant horse-racing track Club Hipico, according to Patrick Cussens, chairman of the Santiago-based copper studies group.

Chinese exports slid in February by the most since 2009, government data showed on March 8. The government will boost rail networks in central and western China and give incentives to build low-income housing, a move that may boost metal demand.

While the price of copper rose as much as 1.1 percent April 2 as traders digested news of the temblor in the Atacama Desert, home to a quarter of the world’s global supply, the metal pared gains as companies said they were largely unaffected by one of the nine biggest quakes in Chile over the past 120 years, according to the U.S. Geological Survey.

Investment Freeze

Anglo and Glencore Xstrata Plc’s Collahuasi, the nearest major mine to the quake’s epicenter, said it expected to make copper shipments on schedule from its Patache port this week after allowing workers to attend to their families who were evacuated following two separate tsunami warnings. The temblor damaged 9,547 houses, of which 1,000 will have to be demolished, according to government data released April 5.

“Big mining in the north handled this well,” Mining Minister Aurora Williams told reporters in Santiago today. “Today, our country can face up to tragedies of this scale.”

Copper’s price slump has led to companies shelving projects that might bring the shortages of the past decade back as early as 2017, according to Sonami.

About 40 percent of the $110 billion of projects under consideration in Chile are being revised or have been postponed, Sonami’s Merino said. Also, much of the investment needed is to replace declining output from aging mines. Mining companies spent $54 billion between 2004 and 2012 without raising output, according to Sonami.

Disruption Specter

A major disruption to a mine may also recreate the tight market conditions of the past decade, said Kenneth Hoffman, head of metals and mining research for Bloomberg Industries.

Outages at mines cost more than 800,000 tons a year between 2003 and 2009 because of labor disruptions, adverse weather conditions and technical difficulties, Hoffman said. That dropped to about 400,000 tons a year since the financial crisis as fewer strikes occurred at major mines, he said.

The threat remains of a more destructive temblor in Chile, one of the most earthquake-prone countries in the world, with a fault line running the length of its 4,270 kilometer (2,653 miles) coast. An 8.8-magnitude quake in February 2010 and ensuing tsunamis killed more than 500 people and caused $30 billion in damage and losses, including interruptions at mines in central Chile run by Anglo American and Codelco.

Priced In

“The expectations for a surplus are priced in to the metal,” Garrett Nelson, an equity analyst at BB&T Capital Markets, said by telephone from Richmond, Virginia. “Historically, supply has fallen short of projections for various reasons. Would this time be any different?”

While the north still shakes with aftershocks, it’s business as usual for mining companies as they load copper at Pacific ports, leaving investors unperturbed with the events of the last week.

“There is too much supply,” Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management, said in a Rio de Janeiro interview. “We see copper prices flat in the next 12 months.”

--With assistance from Agnieszka Troszkiewicz in London and Javiera Quiroga in Santiago.