Copper industry is ready to reap reward of restructuring

There is no question but that virtually all sectors of the copper business are enjoying good times today after what were, for the producers, some pretty tough years. But as a direct result of those difficult years, the U. S. copper industry today is restructured so that, although it is smaller, it once again is becoming competitive with foreign competition.

In 1988, the U. S. domestic industry is configured to produce roughly 1.5 to 1.6 million tons of salable copper, divided approximately as follows: Phelps Dodge and its minority participants at Morenci and Chino will account for just under 600,000 tons. Four companies — Magma Copper, Asarco, Cyprus Minerals and Kennecott — each should produce an estimated 200,000 tons; three companies — Inspiration Consolidated, White Pine (in Michigan) and Montana Resources (in Butte) — will produce in the 40,000 – 60,000 ton range.

Each of these companies has approached the return to profitability and competitiveness in a different way, reflecting in large measure the specific characteristics of the orebodies they are mining. Inspiration, for example, has closed down its mill, is producing all its own copper by electrowinning and is operating its smelter wholly on custom feed. Montana Resources is operating with far lower wage rates than other producers — perhaps on the order of $10 per hour lower — but supplemented by generous profit sharing when profits are earned.

Kennecott sold two of its three mines and applied the proceeds toward a $400-million(US) rehabilitation of its by-product rich Bingham Canyon mine, complete with inpit crushing and conveying and a new mill.

Asarco is cutting $85 million from its costs and demonstrated confidence in its competitive position at the beginning of last year by purchasing the Ray mine from Kennecott. Magma, newly independent, has borrowed $285 million to rebuild its smelter, upgrade its mill and make other improvements toward a reported goal of unit costs around 54 cents per pound of copper.

Despite the diverse approaches, all of us — in striving for a return to profitability — have to work with the same basic four building blocks. The first and most important of these is the copper deposit that nature has provided. To it, we bring the application of the other three: capital, technology and manpower. That sounds simple, but there is a beg caveat — the copper resource has to be good enough to carry you to the cost goal you need to attain.

The current Phelps Dodge business plan was designed in 1984 on the assumption that copper prices would remain in the low 60 cents range indefinitely. The plan works, but basic to its success is that our Morenci and Tyrone orebodies were endowed generously by nature so as to be able to support our cost- cutting restructuring. Had the mineralization been different — or the grade or stripping ratios — we would have been back to the drawing boards, or very possibly we would have become one of those old names no longer in the copper business.

We were looking primarily to accomplish substantial cost reductions. Expansion of our capacity was not initially a primary objective, but it has flowed from our cost reduction programs. Quite frankly, we look at each mining operation as if it were a producer of cash, rather than copper, and that, I believe, is a sound and proper way to look at any business operation.

Indeed, that way of looking at a mine is fundamental to profitability. When mining engineers expand their thinking from putting “rock in the box” to “money in the bank,” their perceptions on how to manage an orebody also expand. Thus, Kennedott’s rehabilitated Bingham Pit is designed to produce less copper but more money, and Inspiration improved its costs by severing its own copper production from its smelting operations. Everyone in this business knows copper prices move down at least as easily as they move up. And it is true that the current boom in copper consumption is four years old, even though the price “boom” has ocurred only in the last six months. I don’t expect the next price downturn to be as deep as that of the 1980s, but at Phelps Dodge we continue to test our capital programs against a 65 cents realized price benchmark.

Our company is working to reduce costs (including depreciation) to less than 50 cents per pound of copper because we believe with costs at that level we will be competitive with both foreign and domestic producers and able to withstand anything in the way of pricing the copper markets are likely to deal to us.

But although we are ready, we don’t expect to be tested on that hypothesis when this current boom ends. Fundamental supply-demand balance within our industry this next time around should moderate the effects of the next recession, whenever it comes. Copper markets are now very tight, and the new production likely to come on stream this year and next — which we estimate will approximate 5% per year — should not do more than reestablish a good balance between supply and demand.

On the other hand, I do not think current high copper price levels will be prolonged. They should move to more moderate levels as that balance is approached, perhaps beginning this summer, assuming demand slows then, as it traditionally does.

At what level prices will find an equilibrium is something I wouldn’t try to predict. But recent price levels, if sustained, in the long run would not be beneficial to our industry. We have succeeded in cost reduction to a point where we now can be very competitive against other metals and materials in the end markets for which we compete. And these high prices are not needed by much of the industry; the average Comex spot copper price last year, the first year Phelps Dodge ever earned over $200 million, was only 78 cents .

There is little question, however, but that these higher prices are very welcome to producers while they last, to give us an opportunity to strengthen our positions still further before the next economic downturn. Unless that downturn develops into a deep and widespread recession, which most economists do not now foresee, and assuming always that the federal government does not force another round of massive environmental or other unproductive costs on us, I think we likely will see a good string of successive years of moderate prices, moderate growth and respectable profits for our domestic copper producing industry. G. Robert Durham is chairman and president of Phelps Dodge Corporation. This article is taken from the American Mining Congress publication Washington Concentrates.