{"id":1174534,"date":"2020-03-27T16:03:48","date_gmt":"2020-03-27T22:03:48","guid":{"rendered":"https:\/\/www.mining.com\/?p=1018493"},"modified":"2020-03-27T16:03:48","modified_gmt":"2020-03-27T22:03:48","slug":"mine-closures-pose-risk-to-global-copper-supply-report","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1174534","title":{"rendered":"Mine closures pose risk to global copper supply \u2013 report"},"content":{"rendered":"<p>The collapse of the copper price and the containment measures taken for the coronavirus pandemic, are posing a significant risk to global copper mine supply and project development, Nick Pickens, research director at Wood Mackenzie said in a note this week.<\/p>\n<div class='d-flex justify-content-center d-xs-block d-sm-block d-md-none'>\n<div id='div-gpt-ad-1561499308230-0'><script>googletag.cmd.push(function() {googletag.display('div-gpt-ad-1561499308230-0');});<\/script><\/div>\n<\/div>\n<p>Day-by-day, mining companies are announcing revised plans to comply with new restrictions. <\/p>\n<p>&#8220;For now, temporary closures will be absorbed by our mine disruption allowance,&#8221; Pickens said.\u00a0 <\/p>\n<p>&#8220;In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply. It would take 45 days to reach our full-year mine disruption allowance.&#8221; <\/p>\n<figure class=\"wp-block-pullquote alignright\">\n<blockquote>\n<p>&#8220;In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply&#8221;<\/p>\n<p><cite>Nick Pickens, research director, Wood Mackenzie <\/cite><\/p><\/blockquote>\n<\/figure>\n<p>&#8220;At this stage, we are not assuming mine supply from these countries will stop in its entirety. However, we believe there is a significant risk that disruptions will escalate, and breach 5% this year.&#8221; <\/p>\n<p>Low prices could hamper mine restarts and new projects. The copper price is currently trading below the 90<sup>th<\/sup> centile of the industry cost curve (223 c\/lb). Temporary closures and construction deferrals have accelerated due to virus containment. However, a sustained period of lower prices could make these more permanent.<\/p>\n<p>Cost deflation will help to ease margins, Pickens said. <\/p>\n<p>&#8220;Our mark-to market analysis suggests that at current market oil prices and exchange rates, the 90<sup>th<\/sup> centile of the C1 plus capex cost curve will fall by nearly 25 c\/lb when compared to 2019. Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant.&#8221; <\/p>\n<h3><strong>Supply disruptions, directly relating to coronaviru<\/strong>s<\/h3>\n<p>In recent days, the reach of coronavirus has rapidly expanded from key regions of copper demand \u2013 China and Europe, to key regions of supply \u2013 the Americas. Peru has enforced widespread quarantine, and some mines are now thought to be on temporary care and maintenance. <\/p>\n<p>\u201cIn Chile, a state of catastrophe has been<br \/>\ndeclared. We have also seen temporary cutbacks and risks to suspensions in Canada,<br \/>\nthe DR Congo and Australia,\u201d Pickens said. <\/p>\n<p>In\u00a0Peru, the government has taken measures to prevent the spread of the pandemic throughout the mining industry. Mining companies have been asked to only mobilise critical employees to mine sites, to implement an emergency plan adapted to the circumstances, and to ensure health protection for a 15-day period, from 19 March. <\/p>\n<p>Critical employees might comprise those who work<br \/>\nin environmental or safety functions such as water treatment plants, ground<br \/>\nstability, tailings monitoring, underground ventilation and security, Pickens<br \/>\nsaid. <\/p>\n<p>This would mean that mining operations would<br \/>\neffectively go under care and maintenance for 15 days. Large operations that<br \/>\nhave followed this measure include Cerro Verde and Constancia. <\/p>\n<p>Some mining companies, such as Buenaventura, have<br \/>\nimplemented these measures at all operations. However, other companies, due to<br \/>\ntheir remote location and capabilities to ensure the health of their employee,<br \/>\nhave decided to just keep slow down production.<\/p>\n<p>Chile\u00a0has also stepped up its response. The government declared a \u201cstate of catastrophe\u201d starting March 19, as the confirmed cases of coronavirus continued to rise. <\/p>\n<p>\u201cThis measure gives the government the capability<br \/>\nto control the food and medical supply chains and distribution, border<br \/>\nprotection, and to enforce curfews and restrict social gatherings,\u201d Pickens<br \/>\nsaid. <\/p>\n<p>\u201cImmediately after the announcement, Codelco said<br \/>\nit would maintain \u201coperational continuity\u201d for 15 days in all is units.<br \/>\nMeanwhile, we understand Spence and Escondida\u2019s union has asked BHP to<br \/>\nimplement stricter measures to ensure the health of its employees or shutdown,\u201d<br \/>\nhe added. <\/p>\n<h3><strong>What does this mean for global supply?<\/strong><\/h3>\n<p>The most noteworthy announcements to date, in<br \/>\nterms of significance to the global copper market, have been from authorities<br \/>\nin Chile and Peru, who are both pointing to a 15-day disruption. All out<br \/>\nclosures in Peru and Chile for 15 days, would see 1.5% wiped from global annual<br \/>\nsupply, Pickens asserted. <\/p>\n<figure class=\"wp-block-pullquote alignright\">\n<blockquote>\n<p>The containment of coronavirus is also affecting construction of new projects, with several major producers announcing they are slowing or temporarily stopping development<\/p>\n<\/blockquote>\n<\/figure>\n<p>\u201cWhile this is significant, it would be absorbed<br \/>\nby our disruption allowance. It is also not likely to be long enough to trigger<br \/>\nforce majeure on shipments.\u201d<\/p>\n<p>\u201cIn our opinion, the restrictions will need to be in place longer than 15 days. It would take 45 days to disrupt 5% of supply from these countries, equivalent to our full-year disruption allowance of just over 1.0 Mt,\u201d Pickens said. <\/p>\n<p>\u201cAt this stage, we are not assuming mine supply from these countries will stop in its entirety. The early indications are that some major companies in Peru and Chile are managing to produce under the restrictions.\u201d\u00a0 <\/p>\n<p>\u201cHowever, there is a worse-case scenario to consider. If the need for containment leads to wholesale lockdown of mine sites, and this Latin  America disruption is replicated in Africa, North America and Australia, this would have catastrophic consequences for global copper mine supply,\u201d Pickens said. \u00a0<\/p>\n<p>\u201cThis is not currently, our base case assumption, but as we publish this Insight, there are clear signs that measures to contain the virus are likely to intensify over the coming days and weeks.\u201d<\/p>\n<h3>Mine supply beyond 2020:\u00a0Project delays put future supply growth at risk\u00a0<\/h3>\n<p>The containment of coronavirus is also affecting construction of new projects, with several major producers announcing they are slowing or temporarily stopping development. <\/p>\n<p>A third of mine supply growth over the next three years will be from Peru (Quellaveco and Mina Justa) and Chile (Quebrada Blanca Phase 2 \u201cQB2\u201d and Spence). Elsewhere, greenfield and brownfield projects in Indonesia (Grasberg Block Cave), Mongolia (Oyu Tolgoi underground) and DR Congo (Kamoa-Kakula) will also contribute significant volumes.\u00a0<\/p>\n<p>\u201cHowever, within the last week, at least three of<br \/>\nthese projects have either stopped or slowed construction. Anglo American has<br \/>\nannounced that Quellaveco construction has slowed, under the 15-day national<br \/>\nquarantine measures taken in Peru,\u201d Pickens said. <\/p>\n<p>Teck has suspended construction activities at QB2 project in Chile for an initial two-week period. In Mongolia, there are reports that work has slowed at Oyu Tolgoi, due to the restrictions placed by the government. Combined, these projects account for a third of the total net growth expected over the next three years.\u00a0 <\/p>\n<p>\u201cThe current supply-side outlook is analogous to the market in 2008\/09. At the start of 2008, there was healthy pipeline of near-term projects, in our probable and highly probable (now included in our base case) categories. But a severe demand shock, brought about by the GFC, triggered project delays. During the 12 months between Q3  <\/p>\n<p>2008 and Q3 2009, we estimate the mining industry<br \/>\ndeferred up to 2.2 Mt\/a of new copper supply. While projects eventually hit the<br \/>\nmarket, they were later than expected. This undoubtedly contributed to the<br \/>\ntighter market and high prices experienced in 2010 and 2011, once the market<br \/>\nrecovered,\u201d Pickens said. <\/p>\n<h3>Highly probable &amp; probable project deferrals: Q3 2008 project pipeline versus Q3 2009 project pipeline:<\/h3>\n<p><strong>\u00a0Supply-side response to price<\/strong>:<\/p>\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-1.png\" alt=\"\" class=\"wp-image-1018483\" srcset=\"https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-1.png 602w, https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-1-300x160.png 300w\" sizes=\"(max-width: 602px) 100vw, 602px\" \/><\/figure>\n<p>The LME cash price closed at $4,855\/t (220 c\/lb)<br \/>\non&nbsp;March 20, falling 15 % in just a week, and 25% since the start of the<br \/>\nyear. The price decline began on 13 March, just after the World Health<br \/>\nOrganisation (WHO) declared a global pandemic. <\/p>\n<p>\u201cSince then, hopes that containment in China,<br \/>\nfollowed by government stimulus could be the catalyst for a V-shaped recovery,<br \/>\nhave faded fast,\u201d Pickens said. <\/p>\n<p>\u201cWith demand contracting and prices plummeting,<br \/>\nan economic supply response now seems likely. The disruption caused by virus<br \/>\ncontainment has been the catalyst for a quicker reaction than is typical by the<br \/>\nmining industry in a downturn,\u201d Pickens said. <\/p>\n<p>\u201cSo far, the covid-19 closures are temporary. However, with prices low, the decision to restart will become difficult for some producers. Furthermore, the longer prices stay depressed, marginal mining operations, not currently disrupted by coronavirus, may be forced to cut production regardless. History tells us, these cuts take a little longer to occur, as operators first cut back on non-essential capex.\u201d<\/p>\n<figure class=\"wp-block-pullquote alignright\">\n<blockquote>\n<p>&#8220;Over the last decade, there have been two periods of price-related mine closures. The first was in 2008\/09 demand shock during the GFC. The second was in 2015\/16, when strong mine supply growth and weaker demand prompted a significant price decline&#8221;<\/p>\n<p><cite> Nick Pickens, Research Director, wood mackenzie  <\/cite><\/p><\/blockquote>\n<\/figure>\n<p>\u201cOver the last decade, there have been two<br \/>\nperiods of price-related mine closures. The first was in 2008\/09 demand shock<br \/>\nduring the GFC. The second was in 2015\/16, when strong mine supply growth and<br \/>\nweaker demand prompted a significant price decline,\u201d Pickens said. <\/p>\n<p>In 2008\/09 prices crashed below the 90th centile<br \/>\nfor a period of six months, reaching well into the third quartile for short<br \/>\nperiods. This resulted in around and 2.2% of price related closures. In<br \/>\n2015\/16, the copper price decline was supply driven and longer lasting. Prices<br \/>\nwere below the 90th centile for 18 months, with 4.2% of annual global supply<br \/>\nremoved from the market.<\/p>\n<p>\u201cThe impact on supply could be less than previous<br \/>\ndownturns, owing to a lower starting point,\u201d Pickens said. \u201cWe expect total<br \/>\nrefined production to decline this year. This in part due to a decline in mine<br \/>\nsupply, but also due to the fall in production from scrap and blister units. As<br \/>\na result, we estimate a supply cut of only 200 kt, beyond the normal 5%<br \/>\ndisruption, would be enough to bring the refined market back to our long-term<br \/>\nequilibrium.\u201d<\/p>\n<h3>Previous supply-side responses to lower prices:<\/h3>\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-2.png\" alt=\"\" class=\"wp-image-1018484\" srcset=\"https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-2.png 602w, https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-2-300x161.png 300w\" sizes=\"(max-width: 602px) 100vw, 602px\" \/><\/figure>\n<p>&nbsp;\u201cWe expect average annual prices will be<br \/>\nsupported at around $4,850\/t (220 c\/lb) over&nbsp; the remainder of the year.<br \/>\nThis assumes that prices will average out at the 90<sup>th<\/sup>&nbsp;centile<br \/>\nof the cost curve, which is now significantly lower than the 2019 level on<br \/>\naccount of a lower oil price and weaker producer currencies,\u201d Pickens said. \u201cHowever,<br \/>\nhistory also tells us that in a demand shock, prices could drop hit lows as<br \/>\n60-70<sup>th<\/sup>&nbsp;centile,<br \/>\nbelow &lt;200 c\/lb for short periods.\u201d&nbsp;<\/p>\n<p>In 2008\/09, prices fell below the 90<sup>th<\/sup>&nbsp;centile<br \/>\nfor a period of six months, reaching well into the third quartile for short<br \/>\nperiods. Meanwhile, in 2015\/16 prices were lower for longer (18 months), but<br \/>\ndid not cut quite as deep, reaching closer to the 80<sup>th<\/sup>&nbsp;centile.&nbsp;<\/p>\n<h3>Historic copper price and copper mine cost centiles, C1 plus sustaining capex (2020$)<\/h3>\n<p><strong>Fuel prices and exchange rates have reduced costs, and the price floor<\/strong>:<\/p>\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-3.png\" alt=\"\" class=\"wp-image-1018485\" srcset=\"https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-3.png 602w, https:\/\/www.mining.com\/wp-content\/uploads\/2020\/03\/graph-3-300x161.png 300w\" sizes=\"(max-width: 602px) 100vw, 602px\" \/><\/figure>\n<p>The oil price crashed in early March, driven by<br \/>\nweak demand and rapidly increasing supply from Saudi Arabia. The result has<br \/>\nbeen a 50% decrease in Brent oil price to less than US$30\/bbl, Pickens<br \/>\nreported. <\/p>\n<p>On average, fuel represents 7% of overall<br \/>\nmine-site costs. A 50% decline in oil prices, from US$64\/bbl (Brent) in 2019 to<br \/>\nUS$30\/bbl in the current market is expected to reduce average minesite costs by<br \/>\naround 5 c\/lb.<\/p>\n<p>\u201cHowever, we expect a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs,\u201d Pickens said. <\/p>\n<p>&#8220;Analysis of historical performance between the price of oil and the cost of energy, services and consumables, suggests that these components could impact average costs by a further 5 c\/lb. The combined direct and indirect sensitivity is therefore 3 c\/lb per $10\/bbl of oil.\u201d <\/p>\n<p>But it\u2019s not just the oil price that is reducing costs, he asserted. In most major copper-producing countries, local currency has depreciated against the US dollar, when compared to 2019 averages. The top ten producing countries (along with US output) account for 75% of global copper mine production in 2019 and, on average, currencies in these regions have depreciated by over 10%.<\/p>\n<p>\u201cOur mark-to-market analysis suggests at current<br \/>\nmarket prices, the 90<sup>th<\/sup>&nbsp;centile of the C1 plus capex cost curve<br \/>\nwill fall by nearly 25 c\/lb to 223 c\/lb. Furthermore, a prolonged period of<br \/>\nlower average oil prices will have a more extensive deflationary influence for<br \/>\nother raw material costs, and the impact could be more significant,\u201d Pickens<br \/>\nsaid. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>A third of mine supply growth over the next three years will be from Peru and Chile.<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[2849,949,369],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1174534"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1174534"}],"version-history":[{"count":4,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1174534\/revisions"}],"predecessor-version":[{"id":1174548,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1174534\/revisions\/1174548"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1174534"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1174534"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1174534"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}