Will copper prices rise if BHP shuts U.S. mines?
Without major mining curtailments, the copper market will see a prolonged supply glut, mediocre pricing, and poor producer profits.
By Staff -- Purchasing, 7/15/1999
What's happening: The seasonal March-June expansion in global copper cathode sales has passed, leaving in its wake more supply (+200,000 tons) and lower prices (-15%) than last year. Word on the street is that BHP Copper, the world's second-largest producer, will soon announce the shutdown of money-losing mining assets in the U.S. "The world has excess copper supplies and needs to reduce production," says Tom Van Leeuwen at Credit Suisse First Boston. "Unless actual and long-standing production curtailments occur, the world copper industry will need to prepare for harsh market conditions including a prolonged supply glut, mediocre prices on metals exchanges and spot markets, and poor producer profit performance." He and other analysts say industry wide cuts of around 250,000 annual metric tons are needed to create a modest supply deficit by end-2000 and to support prices at pre-Asian crisis levels. A new analysis of the world copper market by Dresdner Bank points out that "even strong U.S. economic growth is not enough to soak up existing copper supplies." In 1999, the six-month average for copper cathode on the London Metal Exchange (LME) is 65¢. That compares to 75¢ in 1998 and $1.03 in 1997.Why it's happening: In early 1996, Broken Hill Proprietary, the Australia-based metals and minerals giant known as BHP, acquired Tucson-based Magma Copper, with mines and a smelter in the southwestern U.S. and the Tintaya mine in Peru. Not long afterward, the Asia-Pacific financial and economic crises began to affect world copper markets. BHP Copper has since written off about two-thirds of the Magma assets' book value as copper prices have slumped. It is now desperate to stop cash losses from high cost U.S. mines (Robinson in Nevada, and San Manuel, Pinto Valley, and Superior in Arizona). The Superior mine stopped operating in mid-1996 and most of Pinto Valley has been shut for more than a year. Analysts expect BHP Copper to close permanently all of its U.S. mines but to keep open its Arizona smelter, the world's largest copper-refining facility of its kind. Van Leeuwen is less sanguine that the mines will close, however. "It will be difficult for BHP Copper to shut them and take on all the environmental remediation responsibilities that U.S. government agencies would ask of a foreign company with deep pockets. So, closing the operations could be a very unappealing alternative." Rather, he sees "an auction and fire sale" which would do nothing to eliminate the supply excess.
What's ahead: No matter what BHP Copper does, fundamentals in copper remain unchanged. While some bullish nonferrous analysts anticipate economic recovery in Asia, BSF believes the region is a mixed bag of both rebounding and stagnant economies. As such, copper will see no significant demand recovery in the world's largest buying region. Upshot is that cathode prices will stay low through October-December.
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