LONDON (Reuters) - Copper is underperforming every other major base metal so far this year.
The London Metal Exchange (LME) three-month price is this morning trading around $4,840 per tonne, translating to a year-to-date gain of just under five percent.
And there are plenty of analysts expecting even lower copper prices over the coming months.
Investors are shunning copper, preferring hotter metallic markets such as zinc, currently showing a year-to-date gain of almost 47 percent.
But then zinc has an enticing bull narrative of a pending supply crunch, while copper is struggling to absorb a wave of new mine production, much of it coming from projects that were planned years ago when the price was double current levels and the market was characterized by structural supply deficit.
Famine has turned to feast in the intervening years, extra supply hitting the market just when demand, particularly Chinese demand, is stuttering. Yet another commodities text-book case of bad timing to file alongside iron ore and nickel.
But what’s unusual about this particular copper production surge is where’s it’s coming from.
It’s coming from South America, but not Chile, the country most synonymous with copper production, but rather its northern neighbor, Peru.
Peruvian production of mined copper jumped by a staggering 51.5 percent to 1.12 million tonnes in the first half of this year. National output was 741,000 tonnes in the year-earlier period, according to Peru’s ministry of energy and mines.
The core drivers of this surge are two new mines, Las Bambas and Constancia, and the expansion of another one, Cerro Verde.
Las Bambas, majority owned and operated by MMG, the listed arm of China Minmetals, is the single biggest contributor to rising Peruvian copper output this year.
The mine only came into production in the fourth quarter of last year but has ramped up extremely quickly to the point that MMG could declare commercial production at the start of July.
First-half production was 118,600 tonnes of contained copper, compared with zero this time last year.
Guidance is for full-year production of 250,000-300,000 tonnes and nameplate capacity of 400,000 tonnes next year.
Constancia, owned by Canada’s Hudbay Minerals, is a smaller project and has been ramping up longer since starting production in early 2015.
But first-half 2016 output of 63,800 tonnes was more than double the 30,700 tonnes generated in the year-earlier period.
The focus now, according to Hudbay, is on “optimization of plant performance” with the mine expected to produce 110,000-130,000 tonnes this year, which is actually above the anticipated life-of-mine average performance rate.
Cerro Verde, majority owned by Freeport McMoRan, is now reaping the benefits of a major upgrade that was completed late last year. The expansion will deliver an extra 600 million lb (around 270,000 tonnes) of annual capacity.
First-half production jumped to 260,000 tonnes from 98,700 tonnes in January-June 2015.
Significant tail winds to Peruvian production are also coming from Glencore’s Antapaccay mine and the joint-venture Antamina mine.
Production from Antapaccay rose by 22 percent year-on-year to 106,700 tonnes thanks to the restart of a concentration unit in May last year.
A 31 percent output hike at Antamina, meanwhile, reflects sequencing between copper-rich and zinc-rich parts of this unusual bimetallic ore body.
It’s all a far cry from the trials and tribulations being experienced by South American neighbor Chile.
Chile is still by some margin the world’s largest copper producing nation but output in the first half of this year fell by 5.6 percent to 2.78 million tonnes.
National production in June itself fell even harder by 7.7 percent year-on-year.
In part this year’s falling output is cyclical, resulting from grade variability at Escondida, the world’s largest copper mine.
Average grades at Escondida slumped to 0.94 percent in the second quarter of this year from 1.32 percent in the year-earlier period, according to operator and majority owner BHP Billiton.
Copper production, a mix of concentrates and leached cathode, accordingly slid to 267,000 tonnes from 338,000.
Escondida’s output will recover next year thanks to a $180-million expansion project that is targeted to deliver additional capacity of around 200,000 tonnes per year.
However, Chile’s copper woes are also part structural with state operator Codelco in particular having to invest heavily just to maintain historic output levels as it seeks to overcome a long-term decline in ore grades.
Such investment, of course, has become much harder to obtain in the current weak pricing environment and the company has warned that there will be an incremental impact on production over the coming years.
There are new mines ramping up in Chile such as Antofagasta’s Antucoya, which is expected to hit capacity of 85,000 tonnes per year in the second half of this year.
But Antucoya in part is only compensating for the company’s exhausted Michilla mine, which was put on indefinite care and maintenance last year.
Others such as Sierra Gorda, owned by Poland’s KGHM, and Caserones, owned by a consortium of Japanese entities, are struggling to master complex ore bodies and resulting high production costs.
LIGHT AT THE END OF THE TUNNEL?
These starkly differing South American production trends have some way to run yet.
There’s a bit more to come from Las Bambas and Cerro Verde in Peru before they hit full design capacity.
Chilean production, meanwhile, has been trending lower at an accelerating pace this year and Codelco, the country’s top producer, has switched its attention to cutting costs with serious implications for medium-term production prospects.
Further ahead, though, both countries and indeed just about every other copper producing are going to be hit by the current low price environment.
Capital expenditure on new projects has been sliding for the last four years and it is becoming ever harder to find what the industry terms “world-class” deposits, witness the multiple teething difficulties of some of the latest generation of mines.
This withering of the future project pipeline is the light at the end of the tunnel for embattled producers.
But right now it is still a distant light as the market soaks up the Peruvian mine surge.
(The opinions expressed here are those of the author, a columnist for Reuters)
Editing by David Evans
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