Global Copper Market Tightening

Source:

"Production cuts could create deficit as early as late this year."

Global copper output fell sharply in H110, with 1/10 of the world's mine production off more than 6% from year-ago levels, underscoring an underperforming industry and signaling a tighter supply/demand balance in the months ahead.

Some of the world's top copper producers saw their output drop in H110. Operational constraints, declining ore grades and a slower response to ramp up idled capacity from 2008's economic crisis hammered production rates.

". . .there is an issue starting to manifest itself on the supply side," said Morgan Stanley's Mark Liinamaa,.

According to the International Copper Study Group (ICSG), world refined copper production is projected to be 18.5M tons in 2010.

Project deferrals and delays due to the 2008 economic crisis are expected to result in a lower growth rate for mine production next year, up 2.9% (500,000 tons) to 19.1 tons.

"A lot of the major mines that were built ahead of the correction are starting to show some signs of age," Liinamaa said, "There are some fundamental issues."

One such issue hanging involves declining rates of production at Chile's Escondida—the world's largest copper mine.

BHP (a 57.5% stakeholder in Escondida), forecast a 5%–10% production cut this year due to lower ore grades.

BMO's Bart Melek said the production cut could take as much as 80K–100K tons of copper out of the market.

"That brings us to a deficit probably as early as late this year," he said, adding that inventory levels in London have already begun to reflect that tighter balance.

Copper stockpiles in warehouses monitored by the LME stand at 409K tons, down more than 26% since mid-February levels above 555K tons.

". . .markets globally are tightening up and will increasingly rely on inventories from producers, consumers and exchanges to balance this market," Melek said.

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