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Copper Supply Squeeze Coming, Prices to Jump: Analyst

Copper prices fell on Friday after data from China showed factory activity slowed more than expected in the world’s largest copper consumer. The metal's performance has been lack-luster in the second quarter, with prices finishing flat. But one analyst says copper is set to jump later this year as world demand continues to grow, but mining output declines.

Copper Tubing
Macduff Everton | Iconica | Getty Images
Copper Tubing

Gavin Wendt, Senior Resources Analyst at MineLife, says the world’s biggest copper miners are faced with steadily declining production from their aging mines.

“If we take a look at the Escondida mine in Chile, which is owned by BHP and Rio Tinto, they're forecasting that production this year will decline by 10 percent as a result of declining grades,” Wendt says. “All of the world's major mines are suffering this same problem.”

Wendt points out that Anglo American saw a 14 percent drop in output in the first quarter from its two mines in Chile. While the world’s largest publicly-traded copper miner, Freeport McMoran, expects a 17 percent decline 2011 output from its Grasberg mine in Indonesia.

To meet the worldwide demand for copper, miners will now have to search in riskier global destinations for deposits that are deeper, lower grade and more costly to develop, according to Wendt.

“The low hanging fruit — to use that expression — has already been found, and then they're more expensive to develop,” he says.

Wendt believes that miners will need higher commodity prices in the future in order to bring the more expensive developments on-stream.

There are already signs copper prices may be rebounding. The metal hit a two-month high of $9,362 a ton on the London Metal Exchange on Thursday, before the China data was released.

Wendt says the summer months are usually a seasonal lull for commodity demand but he sees things picking up in the third quarter.

“A lot of factories run down their inventories, people go on holidays — all that sort of thing… Things start to pick up however once we get into the guts of the third quarter.”

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