Codelco Says Tightening to Slow China Copper Demand (Update2)

Aug. 6 (Bloomberg) -- Codelco, the world's largest copper producer, said demand in China for the metal will slow in this half because of government measures to tighten lending and curb inflation.

Prices will "fluctuate" at current levels, Chief Executive Officer Diego Hernandez said in an interview in Shanghai today. The Chilean state-owned company may consider sales agreement with Chinese companies, though it won't sell stakes in its mines, he also said.

Steel and copper demand in China, the biggest consumer, has slipped as the government tightened real-estate lending and cracked down on speculation since mid-April. The weakest manufacturing data in more than a year for July indicates the world's largest exporter is having a "slowdown not a meltdown," according to HSBC Holdings Plc economist Qu Hongbin.

"The Chinese are worried about controlling inflation, and they want to have a GDP growth target at 9 percent, not 11 percent," said Hernandez. "That could slow down the demand a little, but I don't see it for a long period."

Copper for September delivery fell 0.55 cent, or 0.2 percent, to $3.348 a pound at 9:20 a.m. on the Comex in New York. Construction accounts for a quarter of demand, according to the Copper Development Association.

"The big bull run we've experienced in 2003-2008 may not occur again," said Pang Ying, an analyst at Shenzhen Rongtuo Trading Co. "China, Europe, and the U.S. expanded at a fast pace at that time, and we probably won't see that again in the next few years."

Accelerating Inflation

China's inflation accelerated to 3.3 percent in July, the fastest pace in 21 months, according to economists' median estimate before an Aug. 11 announcement. The banking regulator told lenders to include worst-case scenarios of property prices dropping 50 percent to 60 percent in cities where they have risen excessively, a person with knowledge of the matter said.

Property stocks fell the most in three weeks in Shanghai yesterday as the test assumption signaled the government may be growing more concerned about the health of the market.

Still, Codelco is "optimistic" about the copper market because new supplies will be crimped as mining companies are reluctant to take on debt for expansion plans, Hernandez said.

The global financial crisis was a "tough experience" and has made the industry "very conservative," he said. Producers need to know prices will stay at similar levels to current rates to fund new investments, he said.

Debt Funding

"I don't think the industry is ready to increase their debt to finance those projects," said Hernandez. "That in a way is also delaying investment decisions and keeping supply and demand quite tight."

Codelco plans to invest $15 billion over five years to increase its output to about 2 million metric tons. The company last year made record investments in its aging mines after four years of declining production.

The company plans to get $1 billion to $1.5 billion a year from bank loans and bonds, and the balance of the spending will come from its own cash, Hernandez said today. The state-owned company is prohibited by law to sell equity stakes, he said.

"For this year and next year, the balance of the money will mainly come from the financial market, and on the medium and long term, we need to see how our owners want to recapitalize," he said.

Stake Sale

Chile should debate the possibility of bringing in private capital to improve Codelco's competitiveness, Mining Minister Laurence Golborne said in May. Chilean President Sebastian Pinera dropped a campaign proposal to sell a minority stake last year after facing opposition from labor unions and rival politicians. He took office on March 11.

Codelco probably will sell bonds and may sell assets to fund part of a $2.4 billion investment program this year after Chile's government opted not to reinvest the state-owned company's 2009 profit, Chairman Gerardo Jofre said in a June 18 interview. Chile's government is seeking to raise $8.4 billion to help pay for the reconstruction of infrastructure damaged in February's 8.8-magnitude earthquake.

Hernandez, who took the top spot this year after serving as head of BHP Billiton Ltd.'s base metals division, said June 2 that Codelco may raise $600 million to $800 million selling its 40 percent stake in power company E-CL SA within the next 18 months. 

The company is focused on expanding its copper mines now, though it plans to look at overseas ventures outside of its main business in three to four years, Hernandez said today.

Codelco wants to increase its proportion of concentrates output to the metal, and may trim utilization at its smelters, he said. The company doesn't plan to invest in new smelting capacity or shut plants, he said.