The article below is an excerpt from our Q4 2022 commentary.

“Codelco Production Slump Shows Copper’s ‘Tremendous Challenge’”
~Bloomberg 1/24/2023

Copper demand remains strong. According to the World Bureau of Metal Statistics (WBMS), demand for the first ten months of 2022 ran 3.7% higher than the first ten months of 2021. Chinese demand continues to surprise to the upside, even with ongoing property woes and COVID-related lockdowns. For the first ten months of 2022, Chinese demand ran 5.5% higher than in 2021. Indian demand also continues to surge. For the first ten months of 2021, it grew over 30% year-over-year.

In previous letters, we have outlined our belief that surging Indian copper demand would be one of the enormous surprises this decade. Led by increases in Germany and Italy, European demand is also surprising, running 3% higher than last year.

Total mine supply has not kept pace with demand, having increased by 1.7% year-over-year, according to WBMS data. The biggest surprise in mine supply has come from the unexpected drop in Chilean production, which fell unexpectedly by almost 300 tonnes this year, equating to 6%. Half of this shortfall has come from disappointing production from Codelco, the Chilean national copper company.

In our Q1 2021 commentary “The Problems with Copper Supply,” we stressed how falling ore grades and skyrocketing capital costs would eventually produce disappointments on a global basis. We find the Bloomberg news article cited at the beginning of this essay interesting. The authors wrote:

“While Chile has the largest copper reserves, ore quality has been steadily falling. That means mines need to move more rock to produce the same amount, pushing costs.”

Project development is also getting pricier, with the cost of Codelco’s new Chuquicamata underground mine 53% above original estimates and investments in El Teniente 75% over budget.

In our Q1 2021 commentary, we traced the 32-year operating history of Escondida, the world’s largest copper mine, using it as a prime example of the problems associated with depletion and the exponential rises in capital expenditures needed to mine lower and lower-grade ore. Our study ended with 2020 data, and it is instructive to update it for 2021 and 2022.

After completing Escondida’s massive 2017 $7 bn expansion, which increased sulfide milling capacity by almost 70%, copper production rebounded to 1.213 mm tonnes of copper from 770,000 tonnes produced in 2017. Rapidly falling head grades started eroding the mine’s ability to maintain copper production soon after.

By 2022, copper production had fallen by over 200,000 tonnes since 2018. Escondida processed ore with a head grade of almost 1.0% in 2018, but by 2022 it had fallen to 0.78% -- a steep drop of over 20%. The head grade explains practically 100% of lost copper production over the last four years. And our analysis predicts the head grade will drop further.

In 2017, there were 5.35 bn tonnes of minable copper ore at Escondida, with an average grade of 0.65%. Today, there are 5.09 bn tonnes with an average grade of 0.56%. Escondida’s minable ore grade fell by 14% in just four years. In 2022, Escondida mined ore with a head grade of 0.78%, significantly above the reserve grade of 0.56%. Escondida mine managers continue to high grade, first mining their best remaining areas, leaving the poorer sections behind. This all but guarantees production disappointments from now on. Escondida’s operational and production shortfalls represent problems in other copper mines.

Head grades are just one issue bedeviling the industry today. Rising nationalism in a variety of countries is putting additional uncertainty over supply. In the last two years, populist governments in Chile, Peru, Bolivia, and Panama have all threatened and proposed significant increases in mining royalties and taxes.

The most recent and high-profile dispute emerged in Panama, home to the massive Cobre Panama mine (300,000 tonnes of annual production). The Panamanian government declared the 2018 mining law under which Cobre Panama operates to be unconstitutional. The government wants to hike the royalty rate eightfold from 2% to 16% and wants First Quantum (the owner-operator) to guarantee a minimum payment of $375 mm per year, regardless of production or profitability. First, Quantum has threatened to cease operations, and negations are ongoing. At this time, both sides remain far apart.

Civil unrest in Peru has now forced the closure of two large copper mines -- Glencore’s Antapaccay and MMG’s Las Bombas. At 470,000 tonnes of combined copper production, these two mines represent about 2% of total world production. No one knows how long the unrest and blockades will continue. Peru has become a substantial copper producer over the last ten years, representing 9% of the world supply. What happens in Peru has an enormous impact on global production.

Copper demand is now running significantly above copper mine supply, further drawing down exchange inventories. Inventories are now at levels last seen in 2005, just before copper surged nearly three-fold.

China is reopening, which will likely result in a surge in copper consumption. The copper market is in a structural deficit, and inventories are dangerously low. We believe copper could see a massive surge in 2023, -similar to the period between 2005 and 2006.

Intrigued? We invite you to download or revisit our entire Q4 2022 research letter, available below.   

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