LS-Nikko warns of further output cut

SEOUL (Reuters) - LS-Nikko Copper warned on Tuesday that global supply cutbacks may accelerate because of anemic demand, and said a recent spike in copper prices was mainly driven by a build-up in China's inventories.

South Korea's sole copper smelter said it was also considering a mining acquisition through a consortium in the first half to take advantage of low prices and would spend 1.7 trillion won ($1.1 billion) by 2015 to boost self-sufficiency rates, a company senior executive said at the Reuters Global Mining and Steel Summit in Seoul.

"There's demand arising only from governments and actual demand from end-users, such as auto, construction and telecoms, is almost all dead," said Lee Gook-ho, senior executive vice president of LS-Nikko Copper.

"I'm concerned how much government-related demand can actually absorb decreased consumption from end-users and smelters may have to extend the current output cut if demand fails to recover."

Lee said the current price recovery was mainly driven by China's inventory build-up and tight supply of copper scrap resulting from fewer regeneration works.

China, the world's biggest copper consumer, is sucking in thousands of tonnes of copper from across Asia, as Beijing fills its storehouses with metal at bargain prices, which have fallen 60 percent from a record-high $8,940 a tonne in July.

The move by the State Reserves Bureau, the commodity buyer for China's government, drew down copper stocks at London Metal Exchange warehouses and boosted copper prices to nearly $3,800 last week from a low of around $2,800 in late December.

The SRB may eventually import up to 1.2 million tonnes of copper as reserves.

Freeport-McMoran, the world's No.2 copper miner, also said at the summit that further production cuts would be possible if copper prices fell below $1.25 per pound.

"Prices are unlikely to fall sharply from the current level as it will force high-cost miners to cut production and reduce output from smelters as well but upside is also expected to be limited due to weak demand," said Lee, who is in charge of the overseas business development division and raw materials procurement division.

LS-Nikko, which has production capacity of 560,000 tonnes of refined copper, slashed its 2009 output plan by around 5-10 percent to around 510,000 tonnes in January and expects global consumption and output to decline around 4 percent this year.

WORRIES ABOUT 2011/2012

Constraints to mine output, combined with large increases in global refining capacity over the past two years, has led to competition between smelters for limited copper concentrate, resulting in a steady fall in processing fees.

But Asian copper smelters have been able to hike processing fees for 2009 for the first time in three years, as reduced copper prices eased the competition between firms in need of the raw material to produce refined copper.

Asian smelters have won an around 70 percent increase in annual fees to covert copper concentrate into refined metal -- known as treatment charges/refining charges (TCs/RCs)-- to around $75 a tonne to smelt the ore into copper anode and 7.5 cents a pound to refine the anode into copper cathode.

"The increase is a boost but not enough to improve profitability sharply as prices of by-products such as sulfuric acid tumbled and overall copper demand is very weak," Lee said.

He added that the fees could come under pressure again in coming years as considerable cuts to mining output would leave the concentrate market undersupplied.

"I'm concerned about market conditions in two to three years when the economy is expected to recover as sharply reduced financing has decreased new mining projects and it may create very tight market conditions," Lee said.

LS-Nikko, which has copper concentrate self-sufficiency rates of around 3 percent and owns stakes in copper projects in Mexico, Peru and Bolivia, wants to boost the rates to 50 percent by 2015, Lee said.

LS-Nikko is a joint venture between South Korea's LS Corp and a Japanese group led by Nippon Mining & Metals, Mitsui Mining and Smelting and Marubeni has annual copper cathode production capacity of 560,000 tonnes.

(For summit blog: http:/blogs.reuters.com/summits/)

($1=1529.9 won)

(Reporting by Miyoung Kim; Editing by Ben Tan)