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Copper surplus to slow projects: Antofagasta

Keywords: Tags  copper, copper surplus, Antofagasta, copper demand, copper warehousing, China demand, Diego Hernandez, Cesco Week Andrea Hotter

SANTIAGO, Chile — Copper is expected to be in a small surplus for the next couple of years as new capacity opens and mine performances improve, but the slow pace at which new production is developed will tighten the market again by 2016, Antofagasta Plc chief executive officer Diego Hernández said.

"We think the market is still quite tight this year—not too different to last year—but we see a small surplus by the end of the year because there is new copper coming to the market from new mines, new projects being commissioned and mines that are performing better than before; mines that had problems but are normalizing their operations," he said. "In 2014 and 2015 we expect a small surplus, but from 2016 onwards we see things tightening again."

The copper industry is not in the same situation as aluminum, which has seen supply outpace demand for some time, Hernández noted.

"The copper industry has been slow to execute its growth portfolio, even with good prices. This is because it faced a substantial increase in product costs, and because the quality of the projects it was evaluating were worse than those that were in operation, so it’s tough to take a decision to bring them on-stream," Hernández told AMM in an interview in Santiago ahead of the Center for Copper and Mining Studies’ annual Cesco Week.

"Since a year ago, when investors started to worry about capital discipline, the major miners and the industry in general have delayed a lot of copper projects. That’s why I think we’ll see a small surplus in 2014 and 2015. But after that I don’t think the industry will be able to add the necessary additional production," he added.

Rising inventories at London Metal Exchange-approved warehouses and the copper market’s move into a surplus didn’t result from a decline in Chinese demand, the world’s largest copper consumer, Hernández said.

But he remained cautious over the future pace of China’s growth. "Chinese economic growth should be larger this year than last year, but the question mark is whether this requires more copper or not, and it depends on the focus of the growth. Is it still infrastructure and housing, which puts copper center stage; or will it be internal consumption, which is probably less reliant on copper?" he asked. "We are optimistic about China, but of course it doesn’t mean the additional growth will need the same amount of additional copper."

China is drawing down its copper stockpiles, but Hernández said it was "not easy" to know how large those might be, which was adding some short-term volatility to the market.

Demand in the United States is "improving, slowly" after the economic crisis, while Europe will "take another couple of years to normalize," he added.

However, London Metal Exchange-listed warehouse stocks remain an issue.

The nearly 80-percent rise in LME copper stocks since the start of the year is a "concern" and can be attributed to the actions of the owners of the metal warrants, Hernández said.

"I think that certainly the rise in inventories is a concern, but I think that the behavior of the owners of this inventory is also not the same as it used to be. As a result, we shouldn’t apply the same rationale (when we assess stock increases)," he said. "I think that some of the owners of inventories will not dispose of (copper) if they lose money. It will probably only leave warehouses if the price is good for the owners, and if the price is not good then it will probably take longer than before."

Similarly the future launch of physical copper exchange-traded funds (ETFs), which have received U.S. regulatory approval but are facing opposition in the form of an appeal by a major U.S. consumer, "could add short-term volatility, but I don’t see that as really a big problem for the industry," Hernández said.

"ETFs have taken much longer than expected. That means that there are lots of doubts, even among those that are proposing them, over whether they will work or not," he added.

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