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Copper Supply: Why Freeport Management Foresees a Shortfall

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Copper supply

In the previous part of this series, we looked at the copper demand outlook. In this article, we’ll analyze copper supply dynamics. During the 3Q17 earnings call, Richard C. Adkerson, Freeport-McMoRan’s (FCX) CEO, noted, “Wood Mackenzie, one of the industry’s analysts, estimates 5 million tons of new copper projects required over the next decade. The top 10 mines in the world today produce less than 5 million tons a year. So that shows the extent of the amount of copper projects that will be required to be developed.”

Adkerson added, “There simply has not been recent discoveries of world-class mines. And when we look at the opportunities today, they’re in the nature of brownfield expansions of existing resources as opposed to looming major new world-class mines being available to the industry. All of this is very positive for market conditions and supports the industry from a supply standpoint.”

Our view

The sharp rebound in metal prices has improved mining companies’ cash flows. However, there aren’t many opportunities where miners would like to allocate capital, given the overcapacity situation in several metals—including steel and aluminum (RIO)(GLEN-L). Not surprisingly, miners including BHP Billiton (BHP) and Vale (VALE) are looking to grow their copper portfolio, given the looming supply deficit story.

However, there’s a long gestation period between discovering a mine and starting commercial production. Although small brownfield expansion could take much lower time. Copper’s supply-demand dynamics look favorable in the short to medium term as compared to some of the other industrial metals.

In the next article, we’ll see how’s Freeport placed under current markets.

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