China's MMG sees copper price steady, zinc market balanced

MELBOURNE Wed Nov 6, 2013 9:12am EST

MMG Ltd Chief Executive Officer Andrew Michelmore speaks at a news conference in Melbourne June 18, 2009. REUTERS/Mick Tsikas

MMG Ltd Chief Executive Officer Andrew Michelmore speaks at a news conference in Melbourne June 18, 2009.

Credit: Reuters/Mick Tsikas

MELBOURNE (Reuters) - Chinese metals producer MMG Ltd (1208.HK) expects copper prices to hold around current levels in the medium term, with the market supported by solid growth in demand and new mines ramping up more slowly than projected.

In contrast, MMG expects zinc prices to rise as demand growth is set to outpace supply as several older mines outside China shut down and miners struggle to develop new supply sources.

MMG Chief Executive Andrew Michelmore said he sees copper prices holding in the low $7,000 a metric ton range, which is around the current LME 3-month copper price of $7,172 a metric ton (1.1023 tons), or $3.25 a pound.

"I don't see the basis for any wild swing up or down," he said in an interview for the Reuters Global Commodities Summit. "You had people talking $8,500, $10,000, $12,000. I think that heat has come out of it."

MMG, listed in Hong Kong and headquartered in Melbourne, is an arm of China Minmetals Corp CHMIN.UL that has been anointed to drive the company's western expansion in base metals. It produces copper and zinc, with mines in Australia, Laos and the Democratic Republic of Congo. Its Century zinc mine in Australia is the world's third-largest.

Copper prices are being driven down by traders shorting the market on the view that too much supply will be coming on, such as from Rio Tinto's (RIO.AX) Oyu Tolgoi mine and scrap metal supplies in China, Michelmore said, adding that view would probably be proven wrong.

"So I think the market's probably overestimating the rate at which supply's going to come on, and that will create uncertainty in the market."

He does not see African and Asian copper mines, other than Oyu Tolgoi, having much impact on global supply in the medium term, but said MMG is still interested in expanding in both Africa and South America.

"The South American belt is the interesting one in terms of significant volumes of metal that could come on," he said, pointing to the Las Bambas, Constancia and Toromocho projects in Peru and the Disputada project in Chile, among others.

Sources have said MMG is leading one of two Chinese consortiums bidding for the Las Bambas mine that Glencore Xstrata (GLEN.L) has put up for sale.

Michelmore declined to comment on the Las Bambas auction.

On the demand side, he saw Chinese appetite for copper picking up in 2014.

"It's not going to be the high growth that we've seen before. I think it's going to take another six to 12 months to pick up. But certainly confidence is improving with the new government," Michelmore said.

China is the world's largest consumer of most commodities, including copper and zinc.

SHRINKING ZINC OVERSUPPLY

Michelmore said zinc prices are likely to increase as he sees the oversupply in the market shrinking sharply this year to around 50,000 metric tons or less. That's less than half the surplus forecast by The International Lead and Zinc Study Group.

"My view would be that when the numbers come out, I wouldn't be surprised if there were no surplus at the end of the year in 2013. So in 2014, you're going to start seeing it getting tighter," he said.

He said demand growth is good, but the key questions are on the supply side, in China and in the west, where about 1 million metric tons of supply will come out of the market as several older mines shut over the next few years, including MMG's Century mine in Australia.

In China, moves to improve air quality and limit heavy metals run-off into farmland are likely to affect zinc concentrate producers and smelters.

"Our view is that China could, at a certain price, be able to produce from their own mines and new mines the zinc that's needed (in China). Will they? It depends on the environmental restrictions that go on it. That might hold it back," he said.

MMG's Dugald River zinc project in Australia, while delayed due to a reworking of the mine plan, will fill some of the gap.

Beyond that, few new deposits have been identified, and where they have been, such as in Iran and South Africa, little work has been done toward developing mines, which means supply growth will lag demand growth until prices move sharply higher.

"Most of these projects need well over $1 per pound to justify any new project," Michelmore said, declining to comment on what price MMG was basing its Dugald River approval on.

Zinc is currently around 87 cents a pound.

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(Editing by Muralikumar Anantharaman)

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