Industry Trend Analysis - Copper: Holding Its Place, But Slowing Growth Ahead - MAR 2015


BMI View : Chilean copper production will expand 1.6% on average per annum over the next five years , with output totalling 6. 2 mnt in 2019 . Chile will remains the world's top copper supplier through the decade , yet production growth will be modest as miners face both subdued copper prices and operational difficulties.

Chile will remain the world's top producer of mined copper to 2019, yet will see only modest average annual output growth of 1.6% on account of declining output at aging mines and delays with new projects. Although several large projects are scheduled to come online and the country continues to attract investment, subdued prices, declining ore grades and elevated costs will temper aggregate production growth. Latest data from the Chile's Central Bank indeed indicates that 2014 saw a slight y-o-y decline of 0.5% in copper output. Therefore, we now anticipate production growth of 3.0% in 2015, lower than our previous forecast of 3.3%.

Global Majors To Stay On Top

Despite both market and operational headwinds, Chilean copper output will grow as more supply comes online in the coming quarters. One of the largest expansion projects will be at BHP Billiton's and Rio Tinto's Escondida mine. The mine is the world's largest copper producer and several expansion plans are in progress that the company estimates will boost annual output to 1.27mnt by 2015.

Export Growth To Face Headwinds From Weaker Demand
Chile - Copper Exports & Growth, Annual

State-owned Codelco will remain the country's largest producer, having produced 1.79mnt of copper in 2013 and accounting for nearly half of anticipated investment into the copper sector. For the first three quarters of 2014, the company reported that production rose approximately 4.0% y-o-y to 1.23mnt. The company currently has a multi-year investment plan of approximately USD23bn in place, though it announced in July 2014 it was delaying its yearly copper output goal of 2.0mnt to 2025 from 2020. Furthermore, in January 2015 it announced it was also cutting nearly USD1bn of costs to compensate for weak copper prices, though did not say it would cut planned output for the year. The firm's USD2.3bn Ministro Hales mine became operational in early 2014, though the company's project to convert the open pit Chuquicamata mine into the world's largest underground mine is not expected to be completed until the latter half of the decade. While the technological and financial hurdles are very high, decreasing ore grades and the prospect of the mine becoming unprofitable by 2019 are driving Codelco to explore untapped sources of copper.

Chile To Remain Top Supplier
Chile - Top Destinations For Copper Exports, 2013 (kt)

Costs To Remain Elevated, But Strong Dollar To Provide Relief

Chile's massive copper reserves and highly developed copper sector will ensure it remains the world's top producer in the coming years, but rising costs will reduce the country's competitiveness compared with other major producers. Elevated electricity and water costs in Chile, for example, underscores our belief that neighbouring Peru will see higher average annual copper growth through 2019. Chile's electricity generation capacity will struggle to meet growing demand from both the mining and consumer sectors. This is already placing upside pressure on energy prices and increasing costs for mining companies. While Chile's labour costs remain higher than Peru's and industrial action fairly frequent, real wage costs in 2014 saw slower y-o-y growth. Yet declining unemployment since August 2014 and a weaker Chilean peso may put further upward pressure on nominal wages in the coming months.

Chile - Major Copper Investment Projects
Mine Company Expected Output Year
Source: BMI, Company Reports
Caserones Lumina Copper 180ktpa 2015
Sierra Gorda KGMH & Sumitomo Metal Mining Co 220ktpa 2015
Antucoya Antofagasta 80ktpa 2015
Santo Domingo Capstone Mining Corp 65.3ktpa 2015
Chuquicamata (Underground) Codelco 340ktpa 2018

The cost of water is also increasing, particularly in the north. Firms may need to invest more resources in water infrastructure to ensure regular, cost-effective supply. Moreover, the country's congress is currently considering legislation that would mandate the use of desalinated water in mining operations over a certain size. While increasing the use of desalinated water would help reduce conflicts with local communities over water resources, desalination remains power-intensive and has high capital costs. BHP Billiton and Rio Tinto's investment of USD3.4bn into a water desalination facility to supply their Escondida mine reflects this challenge. However, continued appreciation of the US dollar will put downward pressure on the value of various emerging market (EM) currencies, including the Chilean peso. As miners' costs are denominated in local currency, a weaker Chilean peso will help alleviate the burden of cost inflation.

Dollar Strength To Persist
Select Countries - Local Currency/USD, Avg % Chg y-o-y

Antofagasta and Codelco will continue with planned capital expenditures for mine projects, though the latter will extend its expansion plans through to 2025, delaying significant copper output growth until after our forecast period. The Bachelet administration agreed in Q314 to give the firm USD4bn over the next five years, though the firm recently tapped bond markets again to secure needed funding. Mining firms will also need to stay cognizant of opposition among local communities to mining projects on environmental grounds so as to mitigate operational difficulties. Chile's judiciary has shown a willingness to intervene on behalf of local citizens, creating legal troubles and delays for some firms. Foreign firms will thus need to be increasingly sensitive to the demands of local citizens.

Copper Production Forecast (Chile 2011-2019)
Indicator 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Note: f = BMI forecast. Source: Central Bank of Chile, USGS, BMI
Copper Mine Production, '000 tonnes 5,263 5,434 5,776 5,746 5,918 6,037 6,133 6,225 6,312
Copper Mine Production Volumes, % y-o-y -2.9 3.3 6.3 -0.5 3.0 2.0 1.6 1.5 1.4