Phelps Dodge Corp., Phoenix, will cut U.S. copper production by 14% to 175 million lb this year to reduce its cost exposure in the volatile southwestern U.S. electricity market. The firm will also reduce molybdenum output.

The world's second-largest copper producer has managed to secure an additional 60-megawatt firm power contract, according to J. Steven Whisler, president and chief executive officer, and has started construction of a 40-megawatt cogeneration power plant in New Mexico that is expected to be operating by August. But even these measures are not enough, so the company will implement a curtailment at its Chino operation in New Mexico through the end of the year, reducing production by 135 million lb in 2001. The company will also implement 30-60 day production curtailments, alternating between its Tyrone operation in New Mexico and its Sierrita and Bagdad operations in Arizona, taking another 40 million lb of metal off the market.

"These actions help mitigate our exposure to the spot power market, which accounts for approximately 15% of our total southwestern U.S. electricity consumption, and its impact on our production costs. In addition, the plan will minimize power-related disruptions to our operations and the impact on jobs," Whisler says.

The U.S. accounts for 20% of world refined copper supply. Bloomsbury Minerals Economics of London believes the Phelps Dodge cutbacks and seasonal buying trends "will take the world copper market from approximate balance in the first quarter to a large deficit (roughly 200,000 metric tons) in the second quarter."

Copper prices have been depressed recently amid fears that flagging metals demand might be slow to improve as the U.S. economy continues to slide. But even if there is no second-quarter recovery in U.S. copper demand, it wouldn't affect the anticipated supply deficit significantly, Bloomsbury says. "The timing of a U.S. demand recovery is very much a secondary issue. Supply-side developments will be much larger in scale, especially in the second quarter, when they will be reinforced by a strong seasonal deficit."

Analysts suggest that copper demand will improve in second half 2001, leading to higher prices by year-end. George Cheveley, of research house CRU International Ltd. in London, insists that poor first-quarter market sentiment has been exacerbated by year-over-year comparisons, "especially since demand was so strong in the first six months of last year."