Substantial production losses and outages at existing copper mines will cause global copper inventories this year to fall to 47 days of consumption from 52 last year, Scotiabank economist Patricia Mohr has forecast.
In her latest edition of the Scotiabank Commodity Price Index published Thursday, Mohr noted that copper prices "remain quite profitable-yielding a 46% profit margin over average world break-in costs including depreciation."
While refined copper stocks average 61.1 days of consumption from 2000-2009, "LME inventories have actually declined in 2012 and overall global inventories are expected to fall to 47 days of consumption from 52 last year, despite the recent increase in bonded warehouse stocks in China," said Mohr. "This reflects substantial production losses & outages at existing mines this year-Escondida (Chile -75,000 tonnes), Collahuasi (Chile), Los Bronces (Chile -60,000 tonnes), Grasberg (Indonesia -100,000 tonnes) and Lumwana (Zambia -60,000 tonnes)."
In her analysis, Mohr suggested, "This year's under-performance of mining equities may also have encouraged a re-examination of project economics in a bid to ensure high profitability going forward-reminiscent of the decision by major mining companies to delay copper mine expansion in 2000-09, setting the stage for the tight market conditions of recent years."
"Major Canadian gold miners are also examining project expansion more critically, in part due to high capital cost inflation," she added.
Recent announcements by BHP Billiton of project delays, "reflect concern over capital-cost escalation in the face of more subdued metals prices," Mohr advised. "In copper, capital cost inflation (which normally lags metals prices) has averaged 22% per annum from 2002-2011 and is projected to increase by 15-20% this year."
"Operating costs have also advanced by 15% per annum (7% of which relates to mining-specific costs and 8% to the impact of stronger local currencies against a weakening U.S. dollar)," she noted. "High by-product credits from gold, silver and PGM prices-normally subtracted from operating costs-have masked high cost inflation."
Meanwhile, Mohr observed that zinc at 83-cents per pound and nickel prices at $7.36 in late August remain profitable, with relatively low costs in Sudbury and at Voisey's Bay.
"However, aluminum prices at US$0.85 have fallen below average world cash costs-given massive smelter development in northwest China," she noted. "Low hydro-electricity costs continue to put most Canadian aluminum smelters at an advantage."
In her analysis, Mohr suggested that today's low uranium prices are sufficient to justify major mine development "and will have to increase by mid-decade to trigger projects such as the Olympic Dam expansion (even with re-design)."
Spot iron ore prices were only US$94.80 in late August, Mohr said, as Chinese steel mills have been working down inventories, given the slowdown in demand for construction-grade steel. "However, with only 10-20 days of inventory on hand, mills will begin to restock in the Fall, lifting spot prices."