Lack of smelting capacity should sustain copper price

Hopes for an economic turnaround have combined with a shortage of new smelting capacity to drive the price of copper to its highest level in 18 months.

At presstime, the cash price of the metal on the London Metal Exchange had risen to US$1.17 per lb. In June, the price averaged US$1.05. For 1991, the price averaged US$1.06.

While the red metal has a long way to go to reach the 1988 high of US$1.69, analysts are quietly confident that copper can maintain its recent gains and even move upward if western economies improve.

“We figure copper will go up to US$1.20 per lb. next year,” said analyst Julian Baldry of Toronto-based Nesbitt Thomsom Inc.

Analysts, including Baldry, attribute copper’s recent performance to a shortage of smelting capacity, which has allowed smelters to increase treatment charges to around US40 cents per lb. of contained copper from US15 cents.

“As investment fund buying has absorbed almost all of the supply surplus, the price of copper will remain sensitive to any recovery in the U.S. economy or to any disruptions on the supply side,” adds John Hainey, an analyst at L.O.M. & Associates in Toronto.

The threat of a strike by Polish miners at the state-owned copper combine KGHM has already been discounted in the market and will, therefore, have a minimal impact on prices even if it goes ahead, says Hainey. Last year, Poland exported an estimated 150,000-200,000 tonnes of refined copper to western Europe, while Canada, the world’s largest copper exporter, shipped 541,000 tonnes.

Also contributing to the recent price surge is investment buying of the metal, says Baldry. “But how much of an effect the investment buying has had is difficult to gauge,” he says.

Even more difficult to predict, he says, is the impact of expansion at various smelter operations, including Metall Mining’s (TSE) Copper Range complex in Michigan. In Utah, Kennecott, a unit of British conglomerate RTZ (NYSE), is adding a 1.1-million-ton-per-year copper concentrate smelter facility to its operations; scheduled for completion in 1995, the facility will enable Kennecott to process all of its concentrates on site. However, when it comes on stream in 1994-95, the Kennecott facility could also alleviate the current shortage (of smelting capacity) and probably help to depress the price of the metal, analysts say.

Meanwhile, a recent report by copper analyst Roskill Information Services Ltd. of London, England, expects short-term demand for copper to increase to 1.7-2.3% per year. A Roskill report titled The Economics of Copper 1992 says such demand will be fueled by the automobile and telecommunications markets. “Although a recent forecast suggests that copper consumption per motor vehicle has peaked in the U.S., substantial opportunities remain for consumption to increase in vehicles built in other countries,” the report states.

Analysts believe any increase in demand for copper will be welcomed by Third World debtor nations such as Chile, Peru, Zambia and Zaire. Stronger demand is also good news for companies such as Arimetco International (TSE), Rio Algom (TSE), Minnova (TSE) and Noranda (TSE) which are all in the process of bringing new production on stream.

Arimetco Chairman Roy Shipes, who recently described the copper business as “the place to be right now,” is using low-cost solvent extraction and electrowinning (SX-EW) technology at copper mines in the U.S. and South America. Rio Algom’s US$290-million Cerro Colorado project in Chile is targeted for startup in 1994 and should produce 44,000 tonnes annually by the following year. “It won’t take much to boost the share prices of these companies if we see an upsurge in the price of copper,” said Hainey.