MINING IN CHILE — Supply, demand fundamentals drive the

The recent upswing in the price of copper — the red metal set a new 15-month high by topping US$1 per lb. — has caught the attention of producers and investors alike.

Unlike the sudden rallies within the past few years, in which market manipulation of large metal inventories artificially drove the price upwards, the recent rally seems to be based on sound supply and demand fundamentals. Chile is a major contributor to Western copper markets, a position it should maintain with several new mining operations coming on stream and another expansion planned for Escondida.

The main argument supporting the case for a continual increase in price is that as the economies of industrialized countries continue to emerge from recessions, demand will outpace the world’s supply of copper, causing a price increase. Moreover, new demand from developing nations will further increase the price.

The latest rally, which started in January when copper was trading on the London Metals Exchange (LME) in the US$1,700-to-$1,750-per-tonne range, was triggered by stronger-than-expected demand from European, American and Asian markets. This increased demand led to a significant drop in metal inventories in the warehouses of the LME and the Commodity Exchange (Comex) of New York. LME stocks near the end of May stood at 399,725 tonnes of copper, down 24,975 tonnes compared with the previous week and down 199,775 tonnes over the year. Copper is currently trading in the US$2,300-to-$2,400-per-tonne range. According to United Kingdom-based Billiton-Enthoven Metals’ Metals Report, East Asian economies now are estimated to consume almost 30% of the world’s copper, and consumption is expected to grow.

Between 1980 and 1992, copper consumption increased by an average annual rate of 5.2% — more than double the 2% growth rate in Europe and six times the 0.8% average annual rate of the U.S.

The lower average annual growth rates for the European and U.S. is in part attributed to the devastating recessions experienced in the mid-1980s and early 1990s. Now, both European and North American economies are poised for expansion and this should bode well for copper consumption.

The U.S. is the single largest consumer of copper, using up a quarter of the world’s supply. Statistics reported by Billiton-Enthoven indicate that for the last quarter of 1993, the U.S. economy grew at an annual rate of 7.5%. More importantly, copper consumption increased by 9.9% in 1993, compared with 1992.

The biggest end-user sector for copper in the U.S. is the

building-and-construction industry, which accounts for 42% of consumption. (Applications include wiring, plumbing, heating and air conditioning hardware and architectural uses). Given the ongoing recovery in this sector, substantial increases are expected to continue.

Alex Balogh, President of Noranda Minerals, is bullish about copper’s future. “We see the Pacific Rim countries as being a very important part of the demand for copper,” he said. “China, in particular, will be key to the region. China has banned over 150 uses for copper, simply because it lacks sources of copper.”

Despite the upbeat demand forecasts, there are those who feel somewhat less optimistic, especially with regard to the long term. They are mainly concerned about the increase in supply expected to come on-stream within the next four years. What will happen, they ask, to the strong demand and diminishing inventories when all the high-grade, low-cost copper from South and Central America floods the market?

The potential for an increase in the supply of copper is largely due to the advent of low-cost solvent extraction-electrowinning (SX-EW) technology. This technology has enabled companies to mine previously marginal-to-uneconomic, large-tonnage, copper deposits.

According to Metals and Minerals Research Services, a United Kingdom-based consultancy firm, the total output from Western mines attributable to SX-EW production has risen to 10% in 1993 from 7.5% in 1989. Indications are that SX-EW use will dramatically increase the supply of the red metal. Tables from Billiton-Enthoven’s Metal Report highlight just how significant this increase in supply will be. For the 1994-1998 period, Billiton-Enthoven estimates SX-EW capacity from Chile, Peru, Mexico and the U.S. will increase by 998,000 tonnes, while conventional smelter capacity from North and South America, Europe and Asia will increase by 898,000 tonnes. This 4-year increase in capacity totals almost 1.8 million tonnes.

To put things into perspective, annual copper production from Western mines was about 7.5 million tonnes in 1992.

As well as increasing production, SX-EW technology has an impact on cash operating costs at Western copper mines. With increasing SX-EW utilization, cash operating costs at Western copper mines have dropped to US54 cents in 1992 from US58.8 cents in 1990.

A report published by Australian-based AME Mineral Economics states that SX-EW producers are among the least expensive copper mines in the world. Producers such as Mantos Blancos, Chino and Tyrone had cash costs ranging between US27 cents and US29 cents per lb. 1992. These compare favorably with higher-cost polymetallic operations such as Kidd Creek at US69.6 cents, Highland Valley at US70.1 cents and the Ontario division of Inco (TSE) at US85.7 cents.

Average cash costs per lb. in 1992 were US42.7 cents in Zambia, US50 cents in Chile, US52.7 cents in the U.S., US58.4 cents in Peru, US59.6 cents in Australia, US73 cents in Canada and US97.9 cents in the Philippines. AME estimates that average operating costs could fall by as much as 35% as production from SX-EW increases.