Commodity producers including BHP Billiton (BHP) don’t have much control over commodity (DBC) prices. When commodity prices start falling, high-cost producers become unprofitable much sooner than their peers that are placed better on the cost curve. Low-cost producers are able to tide over economic cycles better. It becomes prudent for commodity producers to control their unit production costs. Copper companies have been working to reduce their unit production costs to survive the current slump in copper prices.
Freeport-McMoRan’s (FCX) unit copper cash costs after by-product credits were $1.52 per pound in 3Q15. Freeport-McMoRan expects its unit cash costs to fall to $1.15 per pound in 2016. Richard Adkerson, the company’s CEO, said during the company’s 3Q15 earnings call, “We’ve deferred projects. We reduced our workforce in connection with this cutback. We’re aggressively managing capital, operating and administrating costs. And we’re keeping our finger on the market, and in each of our operations, and we’re prepared to do whatever it takes, whatever it takes, to keep our operations generating positive cash flows to protect our liquidity, hold onto these assets for a better day.”
Lower crude prices
Codelco—the world’s largest copper producer—is also looking to control costs rather than cut production to survive in the current low price environment. As we discussed previously in this series, a stronger US dollar has helped producers outside the United States bring down their unit production costs. Lower energy prices have also helped copper producers lower their unit production costs. Diesel can make up almost 20% of copper’s production costs. Diesel prices have fallen as crude oil prices have corrected steeply.
Lower diesel costs have helped other copper producers, including Teck Resources (TCK) and Southern Copper (SCCO), lower their unit production costs. Also, curtailments of high-cost mines would help miners improve their cost positioning.
However, if miners increase production from their low-cost mines to compensate for the loss in production from the curtailment of their high-cost mines, the desired supply balance wouldn’t return to the market.
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