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Copper Rout Unlikely to Halt Chile $67 Billion Bet: Commodities

October 05, 2011

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Oct. 5 (Bloomberg) -- Chile, the world’s biggest copper- producing nation, expects mining companies to maintain their investment plans even after prices slumped by the most in three years and is seeing few signs of weaker Chinese demand.

Spending on new or existing mines will reach $67 billion over the next eight years, Mining Minister Hernan de Solminihac said in an interview in London yesterday. Codelco, the state- owned copper company, will account for $20 billion of the total. While there has been “some adjustment” in China’s imports, the change hasn’t been “significant,” the minister said.

Copper slumped 33 percent since reaching a record $10,190 a metric ton in February as mounting concern about growth eroded expectations for supply shortages. Goldman Sachs Group Inc., Barclays Capital and Standard Bank Plc cut their forecasts in the past week. Speculators in U.S. futures held their biggest bet on falling prices since July 2009 as of Sept. 20, Commodity Futures Trading Commission data show.

“The fundamentals don’t explain the decrease in the price,” said the 53-year-old minister. “Most of the price is because the people are looking at what is going on in the market, the international turbulence that we have, so they are kind of worried about the situation in Europe and the U.S., so they’re trying to be more careful. As soon as the economy stabilizes, there should be a rebound.”

Copper fell 29 percent to $6,789 this year on the London Metal Exchange, heading for its second-worst year in almost a quarter century. Prices dropped 54 percent in 2008. Futures traded on the Comex exchange in New York slumped 31 percent to $3.063 a pound, the worst performer in the Standard & Poor’s GSCI gauge of 24 commodities.

European Federation

That compares with a 17 percent decline in the MSCI All- Country World Index of equities and a 29 percent return for Treasuries maturing in 10 years or more, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Consumers in China, the world’s biggest users, should take advantage of the slump in prices to restock, Codelco Chief Executive Officer Diego Hernandez said in an interview in London yesterday. Orders from Asia look “quite strong” for next year and clients in Europe are “cautious,” he said.

China imported 235,509 tons of copper in August, 21 percent more than in July and the most since January, customs data show. Stockpiles in warehouses monitored by the Shanghai Futures Exchange fell 45 percent since March.

Hernandez and the minister, who was appointed to the post in July, are in London for LME week. The annual event is attracting as many as 5,000 merchants to the British capital this year for talks on metals markets and supply contracts.

BHP Billiton

BHP Billiton Ltd., based in Melbourne, Anglo American Plc, Rio Tinto Group and Xstrata Plc are among the biggest foreign mining companies investing in Chile. BHP owns Escondida, the world’s biggest copper mine, while London-based Anglo and Zug, Switzerland-based Xstrata own Collahuasi, the third-largest.

Mining companies are basing their investment decisions on the assumption that copper will average $2.50 a pound or more in the long term, De Solminihac said. Chile has 8,000 mines, dominated by the copper industry.

Chile’s government is budgeting for an average copper price of $2.80 a pound this year and $3.02 in 2012, the minister said. The metal averaged $4.19 so far this year on Comex and no futures contract going out to 2015 is trading below the government’s 2012 target. Mining employs 200,000 people in Chile, accounts for 20 percent of the economy and 50 percent of exports, said De Solminihac, who has a doctorate in engineering.

Commodity Analysts

While Barclays cut its forecast for the shortfall in supply five times since April, the bank still anticipates a shortage of 468,000 tons this year and 153,000 tons in 2012, according to a Sept. 30 report. Copper will average a record $10,075 next year, the bank’s team of commodity analysts estimates.

Supply and demand may be in balance in about four years, potentially moving to a surplus by 2018, De Solminihac said.

Mining companies have struggled to keep pace with demand because of declining ore grades and rising costs. Ore grades averaged 0.76 percent copper content in 2009, compared with 0.9 percent in 2002, according to CRU, a London-based research company. That means one ton of rock contains 7.6 kilograms (16.8 pounds) of metal. Copper-mining costs rose 20 percent in Chile last year, UBS AG estimated in a report in May.

Goldman expects copper to reach $9,500 in 12 months, down from an earlier estimate of $11,000, according to a report yesterday. The bank cut its estimate for 2012 world growth to 3.5 percent from about 4 percent. That compares with the 5.2 percent contraction the World Bank estimates took place in 2009. Emerging markets can be “relatively resilient” to slowing developed economies, Goldman’s analysts wrote in the report.

New York

Copper demand shrank 0.9 percent in 2008, amid the worst global recession since World War II, Morgan Stanley estimates. Global stockpiles in warehouses monitored by exchanges in London, New York and Shanghai expanded 15 percent to 652,385 tons this year, about 50 percent more than the average over the past five years, data compiled by Bloomberg show.

Most of those gains were registered by the London Metal Exchange and Comex. China, which accounts for about 37 percent of global copper demand, will expand 9.3 percent this year, compared with 10.4 percent in 2010, according to the median of 10 economists’ estimates compiled by Bloomberg. U.S. growth will slow to 1.6 percent this year, from 3 percent in 2010, the estimates show.

China looks “quite confident to continue with current demand,” Codelco’s Hernandez said. “We don’t see them slowing down but of course it’s early days on this sales campaign.”

--With assistance from Jesse Riseborough in London and Matt Craze in Santiago. Editors: Claudia Carpenter, James Poole

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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