The copper price improvement also reflects less metal available from the Eastern Bloc, i.e. FSU countries, and lower scrap availabilities.
Asian Recovery And Short CoveringThe perception that the collapsed economies of most of the "Asian tiger" nations are recovering has also helped. Once again institutional speculators have played a role. Just as significant buying by speculative funds had helped to buoy the copper price up to mid-1997 and then exacerbated the decline in copper prices to 20-year lows when they sold short on a significant scale, now short covering has no doubt helped to bolster the copper price.
Production Shift To Emerging Resource EconomiesAn ever-increasing percentage of world production is shifting to emerging resource countries like Chile, Peru, Argentina and Myanmar where grades are higher and costs lower. The traditional way of balancing supply and demand by shutting down less competitive production and slowing new mine development may become less effective in the course of future cycles. This is because emerging resource economies (where more and more copper mines will be located) have less well-developed unemployment benefits and mine closures create significant social and political issues in these countries. For now, though, the system appears to be working.
Not all copper producers are slowing down on new mine development, however. CODELCO, the worldÕs largest producer with across-the-board average copper costs believed to be around $0.45/lb Cu, appears to be taking advantage of its low cost structure to expand production. The copper giantÕs viewpoint, no doubt, is the current downturn in the copper market is temporary and Chile needs jobs.
There is substantial potential to expand copper production from higher grade deposits located mainly in emerging resource economies where grades are generally richer than in the developed nations. This is likely to place a cap, for now, on copper prices. The question is at what level this cap will be reached.
Leading copper market analysts in the 1st quarter of 1999 correctly projected improved copper prices. Scotia McLeod analysts projected an average price of $0.75/lb. in 1999 and $0.90/lb. for 2000. They also expect copper prices to remain below the ten-year average of $1.10/lb. for some time. At any rate, better days ahead.
Reprinted with permission of the Mining Opportunity Bulletin.