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Copper Shortage Looms for Macquarie as Codelco Sees Mine Limits

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BASE METALS: Metals End Mostly Higher In Quiet Session

July 6 (Bloomberg) -- The world's biggest copper producers are warning of looming supply limits at the same time that growing concerns about the global economy leave investors with the largest losses in nine years.
While London Metal Exchange futures anticipate prices no higher than $6,519.50 a metric ton through the end of 2011, or 1.2 percent more than for delivery now, 13 of 14 analysts surveyed by Bloomberg expect a shortage next year. Traders are being too bearish because lower prices may curb spending on mines and exacerbate future shortages, said Goldman Sachs Group Inc., which forecasts a price of $8,050 in 12 months.
&quot;In the short-term, we're looking at slowing growth and oversupply, but longer-term, things look good,&quot; said Michael Pento, the chief economist at Delta Global Advisors Inc. in Holmdel, New Jersey who correctly predicted January's slump that began this year's 12 percent decline.&quot;The smart move is to buy copper for a few quarters down the road.&quot;
Codelco Chief Executive Officer Diego Hernandez said last month that higher costs and lower ore grades mean new global supply&quot;is coming very slowly.&quot; Freeport-McMoRan Copper &amp; Gold Inc. Chief Financial Officer Kathleen Quirk said new finds are&quot;extremely rare&quot; and&quot;it is a very constrained market from a supply standpoint.&quot;
Metal for delivery in three months, the benchmark contract, slumped 20 percent since April to $6,469 on concern the economic recovery would slow in the second half. Manufacturing growth weakened last month in China, Europe and the U.S., which account for as much as two-thirds of global demand.
Lower-Quality Ore
Copper for delivery in August is next year's most expensive contract on the LME, trading at $6,519.50. Metal for immediate delivery costs $6,439.75. The first-half drop of 12 percent was the worst since 2001. The highest prediction for next year's average in Bloomberg's survey of analysts was $8,157 from Bart Melek, a commodity strategist at BMO Capital Markets in Toronto. That's 26 percent more than now.
Mining companies are already missing analysts' output forecasts because of lower-quality ore, providing&quot;a bullish pricing signal,&quot; Credit Suisse Group AG analysts led by Liam Fitzpatrick in London said in a report June 30.
For now, traders are focused on demand. China's growth will slow to 9.25 percent next year, from 10.1 percent in 2010, according to as many as 27 economists surveyed by Bloomberg. The country's refined-copper imports fell 8.1 percent in April and 9.7 percent in May.
U.S. President Barack Obama said June 29 that the world's biggest economy is facing&quot;headwinds&quot; from the sovereign-debt crisis in Europe, where governments are cutting budgets. U.S. growth will slow to 2.9 percent in 2011 from 3.2 percent this year, while the euro zone will accelerate to 1.3 percent from 1.05 percent, according to surveys of as many as 66 economists.
Global Equities
More than $7.4 trillion was wiped off the value of global equities since mid-April because of concern slowing growth will sap demand. Energy and commodities companies led this year's 12 percent decline in the MSCI World Index of developed markets. The S&amp;P GSCI Total Return Index of 24 raw materials fell 14 percent.
Copper producers will have to develop new supplies even if demand stagnates, Quirk of Phoenix-based Freeport, the world's second-biggest copper miner, said at a conference in New York on June 4. Average ore grades fell about 26 percent in the last two decades, according to Deutsche Bank AG. Next year's shortage may be the biggest since 2004, Macquarie Bank estimates.
Deeper Discoveries
A greater proportion of discoveries in the last 10 years were more likely to need deeper mining methods than in the previous two decades, according to a presentation in May by London-based Rio Tinto Group. It cost about 95 cents to extract a pound of copper from an open pit mine in 2008, compared with $1.33 from an underground mine, according to data from Addlestone, England-based researcher Brook Hunt, a Wood Mackenzie company.
Prices may exceed the record $8,940 reached in July 2008 as early as the first quarter, according to Leon Westgate, an analyst at Standard Bank Plc in London who forecast this year's plunge. Copper will average $7,708 next year, the highest ever, according to the median in the Bloomberg survey of 14 analysts.
Demand will expand 6.4 percent to 19.98 million tons next year, the biggest gain since 2007, Morgan Stanley predicts. Refined copper from mines and scrap recycling will reach 19.95 million tons, the bank estimates. That production is worth about $143 billion at this year's average price on the London Metal Exchange.
'Declining Ore Grades'
The surplus will shrink next year because of&quot;declining ore grades in mines, infrastructure problems and postponing planned mine projects due to problems with project financing,&quot; Herbert Wirth, chief executive officer of Lubin, Poland-based copper miner KGHM Polska Miedz SA, said in an e-mail.
&quot;The portfolio left to be developed has a lower quality than we have been used to for many years,&quot; Hernandez of Santiago-based Codelco, the world's biggest producer, said in an interview in New York last month.&quot;For these new projects to be developed we need a higher copper price.&quot;
Anglo American Plc, based in London, reported in April that first-quarter output dropped 14 percent from the previous three months because of lower ore grades. BHP Billiton Ltd. and Rio Tinto, the world's biggest and third-largest mining companies, said the same month that year-on-year production in the period declined for the same reason.
Stockpiles monitored by the London Metal Exchange fell 20 percent to 444,500 tons since mid-February, equal to almost 9 days of global demand. Canceled warrants, or metal earmarked for delivery from warehouses, totaled 35,425 tons on July 1, the highest since March, data from the bourse show.
'Decline Again'
&quot;Copper supplies have started to decline again,&quot; said Andrew Karsh, who helps manage $4.8 billion for the Credit Suisse Total Commodity Return Strategy team in New York.&quot;What we see is a continual benefit in terms of the demand for copper.&quot;
Stock analysts are already anticipating higher profit for mining companies. Freeport will report earnings per share of $8.17 this year and $9.14 next year, compared with $5.86 last year, according to the mean estimate of eight analyst estimates compiled by Bloomberg. Shares of the company fell 27 percent in New York trading this year.
Aurubis AG, the world's largest copper smelter, gained 14 percent in Frankfurt trading. A shortage probably began in March and continued through the second quarter, CEO Bernd Drouven said in an e-mail. The company will report earnings per share of 3.59 euros ($4.50) this year, compared with a loss of 1.15 euros in 2009, according to the mean of eight analyst estimates.
BHP Billiton
BHP Billiton, based in Melbourne, fell 16 percent in London this year and Rio Tinto declined 15 percent. KGHM fell 14 percent in Warsaw. Codelco, the world's largest copper producer, is not publicly traded.
&quot;The industry as a whole is facing significant challenges,&quot; said Greg Waller, vice president of investor relations at Vancouver-based Teck Resources Ltd., which mines copper in North and South America and expects to increase output by 40 percent in two years.&quot;In 2011, we are expecting that growth will be back on track and consumption of copper will be strong while the supplies are tight.&quot;
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SMM Morning Review - 2010/7/6 Lead Market 

Copper Shortage Looms for Macquarie as Codelco Sees Mine Limits | Shanghai Non ferrous Metals

Copper Shortage Looms for Macquarie as Codelco Sees Mine Limits

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