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Copper: Impact of falling prices on operational performance

The copper prices in December 2008 dropped to as low as USD 2,800/MT after the financial crisis,  following the highs of USD 8,000/MT in the same period a year ago. This significant drop was brought about by a fall in demand amidst the global financial and economic crisis. The revival of the world economy recuperated the copper prices to its record levels, which rallied as high as USD 10,000/MT during 2011.

Figure 1: LME Copper Cash Price (Source: Bloomberg)

Since then, the prices have seen a decline due to a lower than expected growth in China, which consumes nearly 40% of the global refined copper. However, despite lower prices and decelerating demand, the global mine supply continued to increase at a CAGR of ~2.6% between 2009-15. This increase created surplus supplies and further weighed down prices of the commodity.

The substantial drop in prices lowered margins for copper producers. Although, the level of impact differed and depended on the end product sold, this varied from refined copper to copper wires and electrolytic copper. The revenue per MT dropped by ~12-13% (CAGR) for all major producers such as CODELCO, KGHM, Antofagasta and Southern Copper from 2011-15. This drop corresponded with the drop in the price of copper at ~11% (CAGR) over the same time span. In spite of the low prices and demand, a similar drop in the production levels was nowhere to be found as the major producers increased their output while few small miners either sustained or marginally lowered their production. This resulted in a consistent increase of global copper mine supply from 16.051 million MT in 2011 to 18.665 million MT in 2015.

In such challenging times, the copper producers relied heavily on their operational efficiency to overcome the downfall in prices. The focus was on lowering core cash costs and also postponement of their expansion plans. On an average, major producers lowered their C1 costs by approx. ~5-6% on a YoY basis during 2011-15. CODELCO which is the world’s largest producer of copper and accounted for 10% of the global output in 2015, set its priorities straight with various cost containment programs which have so far yielded results and costs dropped from USD 4,500 per MT in 2011 to USD 3,500 per MT in 2015. The cost control programs are not only limited to the world’s largest producer of copper but companies like Southern Copper, Antofagasta, KGHM also devised identical strategies to lower their costs.

Figure 2: Cash Cost per MT Sold (Source: Company Reports, Televisory’s Analysis)

Notwithstanding the challenges, the outlook for the copper industry remains marginally positive, with signs of recovery in the Chinese economy and stabilisation in other major copper consuming nations. The effects of these developments were seen in copper prices, which have witnessed slight improvement in 2016. The average price for Q3 is USD 4,800 per MT which is slightly better than Q1. On the flip side, a consistent and higher than anticipated rise in prices could lure the producers into pressing for added expansions which could again pull the prices down. A significant movement is highly dependent on how demand materialises from the largest consumer China. 

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