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Some miners, such as BHP Billiton, have put copper projects on hold, but many others are expanding or building new mines.The Associated Press

Asharp drop in copper prices last week may be just the start of more woes for the industrial metal that has best weathered the global economic crisis.

Copper markets are threatening to move into surplus this year as demand is subdued by a slack global economy and new production comes into the market.

"One of the reasons why copper prices have been so incredibly strong in the past five years has been the fact that there's been very little new mine supply come on stream," said Patricia Mohr, vice-president of economics and commodity market specialist at Bank of Nova Scotia.

"Copper has been in a deficit until fairly recently, but it seems it may shift this year into a surplus," she said, pointing to expansions and new mine construction in countries from Chile and Peru to Indonesia, the African continent and Canada.

Copper's inability to maintain firm prices is a worrying signal that the outlook for the global economy is too weak to provide solid demand. Prices for the industrial metal, often called Doctor Copper for its ability to act as an indicator of broad economic health, touched eight-month lows of around $3.32 (U.S.) a pound Thursday amid news that U.S. service industries expanded at their slowest pace in seven months in March. Copper was trading at more than $3.70 a pound earlier this year.

At the same time, inventories in warehouses monitored by the London Metal Exchange were at their highest since October, 2003, when copper was trading at around 90 cents a pound and China had not yet roared onto the market in an unprecedented urbanization drive.

Copper has been one of the strongest base metal performers over the past decade, pushed higher by such explosive growth in China that prices only briefly wavered after the onset of the 2008 global economic crisis.

The metal is used in construction, power generation and transmission, the auto industry and other areas, and has been a key ingredient in a decade of Chinese city building.

"Copper could be a sideways trade for a couple of years as the market absorbs some of this new supply," said David Garofalo, chief executive officer of HudBay Minerals Inc., which will put the Constancia copper mine into production in Peru next year.

"I don't think anyone is talking about shortages any more," said Bart Melek, head of commodity strategy at TD Securities Inc. in Toronto. "If you look at inventories in Europe, they're massive."

Those concerns will be top of mind in Chile this week as executives from the world's top copper miners and consumers gather in Santiago for an annual conference called CESCO week.

Among the keynote speakers is LME CEO Martin Abbot, who is expected to talk about the demand outlook from China and other key emerging economies, and whether current conditions mark a new trend or are just another pause in the meteoric rise in prices over the past ten years.

Mr. Melek forecasts average prices for this year of $3.50 a pound, boosted from current levels as demand rises in the second half of the year. For next year, he sees average prices of $3.30 a pound. Ms. Mohr forecasts average prices of $3.54 a pound this year, falling to $3.20 a pound in 2014. At those levels, prices still afford solid profit margins to many producers, with costs barely over $2 a pound on average, but they are also very close to the break-even costs for some new mines.

To be sure, it's not clear that all the promised new production will actually come on stream at a time when chief executives are on notice from shareholders to rein in spending amid the worst cost inflation in decades.

Already, as much as $100-billion in copper projects have been put on hold or cancelled over the past year, including the $20-billion (U.S) expansion of Olympic Dam, an Australian mine that is the world's fourth-largest known copper deposit. Big miners, such as Rio Tinto PLC, are putting smaller assets on the block.

Producers say the big wild card is consumption, because demand could swing dramatically higher with changes to global economic headwinds. The U.S. auto and housing sectors are showing signs of growth, for example, but bullishness is tempered as other areas of the economy sputter.

Don't discount China, miners say, and its tendency to roar back into the market when the world least expects it.

"You never know if they are going to be in there in the next while in a big way," said James O'Rourke, CEO of Copper Mountain Mining Corp., which put a mine into production in British Columbia just as copper prices were climbing toward record levels of $4.50 a pound in 2011. "They are big buyers and they are going to work the market to the best advantage they can."

At present, Chinese demand for the metal is still strong, but inventories are building as a new leadership weighs infrastructure needs against a need to curb inflation. Analysts predict China could see economic growth of more than 8 per cent this year, slightly greater than in 2012.

"The super cycle is not finished yet, this is but a parenthesis …," said Juan Carlos Guajardo, executive director at CESCO, the Center for Copper and Mining Studies, a global copper industry think-tank whose members include the world's largest mining companies.

Looking out a few years, most experts predict an uptick beginning in 2016 as markets recover, especially in the United States and Europe, and supply again becomes constrained.

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