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Stock Strategist Industry Reports

Recent Developments in Copper

More production cuts are likely.

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Copper prices have fallen 68% to $1.30 per pound from their peak in July as the outlook for copper demand dimmed. According to the most recent data released by the International Copper Study Group, world refined copper usage in the first nine months of 2008 increased by 2.7% compared with the first nine months of 2007. Refined copper usage in China, the world's largest user of copper, increased 12.7% while usage in the key markets of the United States, Japan, and Europe fell. World mine production decreased 0.8% as a result of lower output in Indonesia, Chile, and Argentina. Lower copper prices and tight credit markets are causing copper miners to delay expansion projects, but production cuts at operating mines are only just beginning. If prices remain depressed, we think further curtailments are likely.

Background: Copper Production and Uses
Chile is the top copper-producing country, followed by the U.S. and Peru. Leading publicly traded copper miners include  Freeport-McMoRan (FCX),  BHP Billiton (BHP), Xstrata,  Rio Tinto (RTP),  Anglo American (AAUK), and  Southern Copper (PCU). Copper has many applications, including electrical wire, plumbing pipe, and motors.

Expansion Delays
Freeport-McMoRan, the world's second-largest copper producer (after Chile's state-owned CODELCO), is deferring incremental expansion projects, mine restarts, and development projects in North and South America. In total, these projects amount to an incremental 535 million pounds of annual copper production. (For context, note that Freeport-McMoRan expects to sell 4 billion pounds of copper in 2008). Meanwhile, Anglo American is delaying an expansion project in Chile. The expansion at the Los Bronces mine is expected to bring 375 million pounds of incremental annual production on line.

Production Cuts
Freeport-McMoRan announced Dec. 3 that it would reduce 2009 copper sales from its North American mines by 100 million pounds versus 2008 levels. Freeport is reducing operating rates at three out of six of its producing mines, and suspending operations at a fourth mine. The company estimates that its net cash costs (which incorporate byproduct credits) will average $1.33 per pound in North America in 2009, and two thirds of its operations will have net cash costs between $1.40 and $1.60 per pound. In South America, Freeport is reducing its 2009 copper sales by 100 million pounds. This reduction is largely attributable to the mining of lower ore grades at two out of four of the company's South American mines. The company estimates that its net cash costs will average $1.10 per pound in South America in 2009, and 25% of its operations will have net cash costs above $1.25 per pound.

Near-Term Outlook
If copper prices remain depressed, we expect more production cuts and expansion delays. For example, with two thirds of Freeport-McMoRan's North American operations operating with net cash costs above $1.40 per pound in 2009, it's likely that the company will cut more production at those locations. Curtailments in South America are also a possibility because 25% of the firm's activity there operates with net cash costs above $1.25 per pound.

Elizabeth Collins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.