Will copper rout affect future project development?

With copper prices tanking to levels not seen in six years, Chile's mining industry has started to voice its concerns. The plunge is no minor issue for the largest copper producer in the world, as the red metal accounts for half of its exports and close to 10% of its GDP.

Just a couple of weeks ago the country's state copper commission Cochilco published its latest quarterly report on the copper market in which it forecast that the average price of the metal this year will be US$2.53/lb.

BNamericas talks with Cochilco's head of studies and public policy, Jorge Cantallopts, to get his take on the current price environment and what it means for the local industry.

BNamericas: What's your view on the current price rout? Has it been more severe than predicted?

Cantallopts: It has indeed been stronger than we had anticipated in our last report. There are a number of possible scenarios that we have taken into account, mainly the possibility of a rise in interest rates in the US, which affects all commodities, not just copper – and the chances of this happening are now greater.

And on the other hand there's Chinese demand, which we were anticipating would be weak, but the latest figures show that demand is even more lackluster than we thought.

So, the copper market fundamentals haven't exactly been helping lend support to prices, and these two, more downbeat factors are what's different from a month and a half ago.

BNamericas: But on the issue of US interest rates, shouldn't that have been factored in?

Cantallopts: That's what most analysts are saying, but as the deadline approaches [market participants expect the hike will occur in December] there is a lot of speculation among financial investors. Market speculation is a big component [of the current scenario], as there are investors that today are betting on the [strengthening of the] the US dollar, which impacts commodities.

BNamericas: Regarding recent production cut announcements, it seems they haven't had much impact. What's your take?

Cantallopts: Exactly, but I insist, what's explaining prices today, in terms of market fundamentals, is that Chinese demand is coming in slower than anticipated, and probably next year will remain slow, even slower than we are anticipating, below 3% in demand growth.

Now, I wouldn't rule out new output cut announcements, because those that have been made are not located in the last quartile of the cost curve, some are located in the middle of the curve, leaning towards the fourth quartile, but they are not the costliest ones. So, there is still room for some operations, the least efficient ones, to make cut announcements.

BNamericas: Usually, these cuts have an impact on small and medium-sized miners. What's your view?

Cantallopts: With the price scenario we had a few weeks ago, with prices around US$2.30/lb, you could say that these operations were handling the impact well, not entirely, as there were a few that suspended operations. But with today's prices, they need to reevaluate things, especially if prices continue to be around US$2.0/lb over the next few weeks.

BNamericas: What impact could the current price scenario have on the development of new projects?

Cantallopts: There needs to be a structural change in the way projects are conceived, as now it is very important to take into account other factors, such as community relations, how to deal with institutions, and how companies can do this better.

But there's also a technical and economic issue, meaning that at current prices, and assuming projects are developed as they were in the past, projects simply won't work. That's the reality.

So, it is true that projects are developed taking into account long-term prices, but investors also take a look at the short-term price scenario to determine how long it will take to recover their investment.

There are technical issues that now need to be addressed, that have to do with efficiency, technology and innovation that will lead to a reduction in the cost of projects.

BNamericas: If prices remain at current levels, could this have an impact on the portfolio of projects in Chile?

Cantallopts: I don't think short-term prices should have an influence, but we need to wait a few months to actually determine their impact. If current price levels have an impact on long- term forecasts, then it could create difficulties in terms of capacity to develop projects.